A comprehensive analysis of the data-driven approach to options trading before earnings announcements. Learn how to profit from IV crush using straddles and calendar spreads with proper risk management.
The earnings volatility selling strategy involves selling short-term options (straddles or calendar spreads) before earnings announcements to profit from two key factors: the rapid drop in Implied Volatility (IV) post-announcement (IV Crush), and the tendency for stocks to move less than the options market has priced in.
Historically, the implied volatility (IV) priced into options before an earnings event is higher than the realized volatility (RV) of the actual stock move. This premium exists because of uncertainty.
We profit when this uncertainty resolves and IV "crushes" back to normal levels.
Price-insensitive participants who buy protection regardless of cost to secure portfolios.
Buy short-dated calls hoping for lottery-like payouts, inflating demand and prices.
Filter the universe of upcoming earnings announcements for high-probability setups using three key criteria:
Front-month IV must be significantly higher than back-month IV, indicating overpriced short-term volatility.
Implied volatility should be inflated relative to historical realized volatility (ideally ratio > 1.5).
High average trading volume ensures minimal slippage on entry and exit.
Open position 15 minutes before market close on earnings announcement day.
Close position 15 minutes after market open the following trading day.
≤ 2%
of capital per trade
≤ 6%
of capital per trade
Never use full Kelly sizing. Even with statistical edge, improper sizing leads to ruin.
The most direct way to short volatility. Involves selling one at-the-money call and one at-the-money put with the same expiration.
A defined-risk alternative involving selling front-month and buying back-month options at the same strike.
Blindly trading every earnings event results in near 0% mean return. The edge only exists when filtering for high-probability setups.
Most important predictor of success
Confirms overpriced volatility
Indicates price-insensitive participants
Kelly Criterion maximizes growth theoretically but leads to unacceptable volatility in practice.
Strict sizing protects against devastating impact of tail risk events.
Balance between meaningful returns and capital preservation.
Wide bid-ask spreads can completely erase the strategy's edge.
Using 10% Kelly sizing (6% of capital per calendar trade) with 0% bankruptcy risk
Amazon (AMZN) earnings trade flagged as "RECOMMEND" by the screening criteria
A straddle on the same event would have yielded higher profits but with unlimited loss potential. The calendar's defined-risk structure provides crucial protection against large unexpected moves.
To build an effective scanner, you need to implement the filtering logic that identifies high-probability setups from the universe of earnings announcements.
Negative values (backwardation) indicate favorable conditions
Values > 1.5 indicate overpriced volatility
Minimum threshold typically 500k shares/day
Remember: Proper screening, position sizing, and risk management are essential for success.
This analysis is for educational purposes only and does not constitute investment advice. Options trading involves substantial risk and is not suitable for all investors. Past performance does not guarantee future results. Always consult with a financial advisor and never risk more than you can afford to lose.