A thread.

Earnings Trades Simplified.

Earnings announcements are public announcements that display a company’s earnings, or lack thereof. As the earnings announcement gets closer, implied volatility tends to increase. After earnings are announced,...


the uncertainty of what will happen diminishes, and usually we see a rapid decrease in implied volatility because of it. Because of this phenomena, we tend to stick to premium selling strategies when it comes to earnings plays. We can take advantage...

of the implied volatility crush by selling premium prior to the announcement, and buying it back after the announcement.

Earnings trades are not for everyone, as they involve high amounts of uncertainty and random movements.

Why Trade Earnings -

-Increase number of occurrences, many trades available so increases of our probability of profit.

-High IV opportunities

-Short term Binary event leading to drastic volatility crush.

Factors to consider when placing earnings trade -

1. Expected Move
2. When to place trade
3. Historical Moves
4. Strategies based on market conditions

Expected move

Normally calculated by IV, stock price, expected move period(as no. of days) by formula

Price * IV * SQRT(days/365)

Market Makers expected move -

ATM Straddle * 0.85* =(both the sides from strike)

Both have some differences.

Example INFOSYS -

ATM (1140) Straddle = Rs.100 approx.
Days to expiration = 15 (29 October)
Stock Price - 1140
IV = 50%

Expected move till expiry - Rs.115 Either way from spot
Market Maker move - Rs.85 Either way from spot.

When to place trade -

If Earnings is overnight, say tomorrow, place the order at end of the day today for better delta position.

If Earnings is during market hours, at the start of the day as the timing of the earnings can be easily switched during the course of the day.

Historical Moves

Did the underlying in which the trade is taken historically overstated IVs are understated, in case of INFY case shown below it has understated 5/7 times in last 7 quarters after earnings.

Yellow Dotted lines are earnings days.

Strategies to Use -

Only basic ones. Will explain three of them here.

1) Iron Condor - Beginner Strategy, can be used for any underlying. Basic Setup, example on INFY. Explained Iron Condor in y previous threads.

2) Chicken Iron Condor.

Can be used for large underlying or IV percentile > 90. Better Risk Reward than Iron Condor. Basic Setup as shown below. Sell closer strikes than Iron condor.

3) Jade Lizard. - For taking a direction. For long Side, the idea should be such that when a blow through move happens on your side happens you should collect some credit. Opposite of the same can be setup for bearish side also. This is unlimited risk strategy. Setup -

As this is a earnings season, hope most of you find this thread helpful. Just tryout basic risk defined strategies and learn. The purpose of the thread is to understand why we do what we do and just a bit of 'How'.

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