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Four times a year, most public companies report earnings. For a day or two, a stock can move more than it does in a normal month. That’s why traders love earnings season – and why a lot of them blow up their accounts during it.
Here’s how I approach it: on stocks I’d own, sized on purpose, and planned before I click anything.
What an earnings play is
An earnings play is a trade built around a company’s earnings report. The goal is to take advantage of what happens to the stock and its options before and after the announcement.
Two things to know first:
- The date and time matter. Companies report either before the market opens or after it closes. If you get that wrong, you’re in the wrong trade at the wrong time. I always confirm it.
- The options already “know” earnings is coming. That’s the part most people miss, and it’s the next section.
Implied volatility and the “IV crush”
Every option price has a piece called implied volatility, or IV. Think of it as how big a move the market is pricing in. More uncertainty = higher IV = more expensive options.
Before earnings, uncertainty is high, so IV climbs and options get pricey. Once the numbers are out, the uncertainty is gone. IV usually drops fast, often by the next morning. That drop is the IV crush.
What that means in real life:
- If you buy options before earnings, you’re paying the inflated price. The stock has to move more than the market expected just for you to come out ahead. You can be right on direction and still lose money because the crush ate the option’s value.
- If you sell options before earnings, the crush works for you – but you’re taking the risk that the stock moves further than expected. A big gap can run right past your strike overnight.
A rough way to see what the market expects: the price of the at-the-money straddle (one call plus one put at the same strike) gives a ballpark “expected move” for the event. It’s an estimate, not a promise. Stocks beat that move all the time.
Real example: Wells Fargo (WFC) reported before the open on July 14. The day before, I sold a put about 6.5% below the stock price, expiring that Friday. The report came out and the stock went the wrong way for me: down about 2.7% at the close, and more than 4% at its low. You’d think that put would be worth more. It wasn’t. I bought it back that same day for about 90% less than I sold it for. The stock moved against me and the option still lost most of its value. That’s IV crush.
That’s one example from my own trading; your results will vary.
Why I sell puts into earnings (and when I use spreads)
Most of my earnings trades are simple. I sell a single put on a stock I’d be happy to own. My PXO software gives me the stock’s expected move, and I only sell puts at or below that price.
Here’s why that works for me:
- IV crush is on my side. I’m selling the option while it’s expensive. After the report, it usually gets cheap fast. The WFC trade above is a good example.
- If it gaps through, I may just own it. Earnings can gap a stock 10%, 20%, sometimes more, overnight. You can’t get out while the market’s closed. If the stock drops through my strike, I may take assignment and start selling covered calls. That’s the wheel. It’s why I only do this on stocks I’d actually want.
- I use margin when it’s appropriate, to earn more. That’s a choice, and it cuts both ways. Margin makes the losses bigger too. A stock can gap well past my strike, and the loss can be a lot more than the premium I collected. The LVS trade below shows exactly that.
What I don’t do: I don’t sell calls on stock I don’t own. When I sell calls, it’s covered calls on shares I already hold.
Where spreads come in: I use them on SPY, or when the account doesn’t have room for the full position. A put credit spread (a vertical) is selling one put and buying a cheaper put below it, same expiration. The put I buy caps the damage. My max loss is the width between the strikes minus the credit I took in. Smaller premium, but I know the worst case before I enter.
What can go wrong, honestly:
- A gap can blow right through the strike. IV crush doesn’t save you when the stock moves way more than the market expected.
- Assignment ties up the account. Once I own the shares, that buying power is stuck until I sell calls and work my way out, or take the loss.
- Spreads aren’t perfectly clean either. Short legs can be assigned early, and if the stock lands right near a strike at expiration (“pin risk”), things get messy. I usually close or manage spreads before expiration instead of letting them ride.
The specific setups I use come from what Rockwell Trading teaches. I use PXO (PowerX Optimizer) to help find and plan these trades: PowerX Optimizer.
Position sizing: a % of my buying power, every time
This is the rule that keeps me in the game.
Before I enter an earnings trade, I look at how much buying power it ties up and ask one question: what % of my buying power is this? If it’s more than my limit, I trade fewer contracts or I skip it.
Right now my limit is high. I’ll put up to about 24% of my buying power on a single earnings trade, because I’m in growth mode and trying to grow the account. That’s aggressive. It’s my choice for my account, and I know one bad gap can hurt. If you’re newer at this, size smaller.
Why % instead of a dollar number? Because it grows and shrinks with the account. It also forces me to treat every trade the same – the one I’m excited about doesn’t get to be bigger.
I also think about how many earnings trades I have on at once. Five trades reporting the same week in the same sector can act like one big trade if the whole group moves together.
Why most people get burned
I’ve seen the same mistakes over and over, and I’ve made plenty of them myself. Chasing a big premium, using too much margin with no plan, selling puts on a stock I didn’t really want. I’ve done all three.
- Buying options at peak IV and getting crushed even when the stock moved their way.
- Going too big because they’re “sure” about the report. Nobody knows what a stock will do after earnings. Not analysts, not me.
- Selling puts on stocks they wouldn’t want to own, just for a fat premium, then waking up to a gap.
- Using too much margin with no plan for assignment. The premium looks great until the shares land in the account.
- No plan. Not knowing the max loss, the exit, or even the report time.
- Chasing losses. Taking a bigger trade on the next report to “make it back.”
- Selling a call below your cost basis. If the stock runs and gets called away, you lock in a loss. I’ve done it.
- Selling calls on shares you want to keep. A strong move can take them away from you. I’ve done that too.
None of these are about being smart. They’re about discipline.
My mindset
The Army taught me that a plan beats a feeling. That’s how I treat earnings.
- Plan the trade before the trade. Setup, max loss, size, exit. Written down. If I can’t explain it in one sentence, I don’t take it.
- Accept the loss up front. If I’m not OK losing the max on this one, it’s too big.
- Think in batches, not single trades. I can’t predict any single report. What matters is following the same rules over many trades.
- Skip freely. Some reports aren’t worth it. No trade is a fine trade.
- Stay boring. The goal isn’t a big win. It’s to keep the account growing toward the Forever Dividend, our long-term family account.
Here’s one that went wrong. Las Vegas Sands (LVS) reported after the close on April 22. That day I sold a put about 5% below the stock, expiring two days later. LVS beat estimates and still dropped about 8.6% the next day, right through my strike, and I got assigned. I sold covered calls on it for a while and collected two dividends, but as I write this the stock is down about a third from my strike. Counting every premium and dividend, I’m still down roughly 28% on the strike value. LVS is a good company, so I’m not panicking. I’m holding it, working it as a wheel trade, selling covered calls and collecting dividends until my cost basis comes down far enough that I can sell it or let it get called away. That’s the whole point of only selling puts on companies I’d be glad to own.
That’s one example from my own trading; your results will vary.
The lesson goes two ways. Sometimes I should just take the loss and put that money into a better trade instead of nursing a loser. But working trades like this one has also taught me how to recover, and I’ve turned some losing trades into winners.
Wrapping up
Earnings in one line: the options already price in a big move, so sell puts only on stocks you’d own, respect margin, and have a plan before the report.
It’s one of the tools that pays for the miles out here. If you missed it, start with How I Run the Wheel. And if you want to see where the van was parked during earnings season, we’re on YouTube at @CJVanVentures.
Not financial advice. I’m sharing what I do with my own money, for education only. Options involve risk and are not suitable for everyone – you can lose money. Short puts can lose far more than the premium collected, and margin magnifies losses. Read the OCC’s “Characteristics and Risks of Standardized Options” before trading options. I’m a Rockwell Trading referral partner and may be paid if you buy through my link.