Trading around earnings

Four times a year, public companies report their results. For a day or two after, a stock can move more than it does in a normal month. Plan for that before the report, not after.

The date and the time of day

Most large US companies report during a six-week stretch that starts a couple of weeks after each quarter ends. That stretch is earnings season.

BMO means before market open, so the stock reacts in premarket trading and at the 9:30 AM ET open. AMC means after market close, so it reacts after 4:00 PM ET and again at the next morning's open. Either way, the price can gap, meaning it opens far from the last close and skips the prices in between.

The quarter versus the guidance

The report covers the quarter that just ended: revenue, and earnings per share (EPS), which is profit divided by the share count. Beating or missing the average analyst forecast, called the consensus, makes the headline.

Guidance is what management expects for the next quarter or year. The quarter is history, and stock prices are built on the future. That is how a company can beat every number and still fall 8% the next day, because it lowered its outlook.

The expected move

Find the first expiry after the report and add the at-the-money call price to the at-the-money put price. At-the-money means the strike closest to the stock price. That pair is called a straddle, and its price is a rough estimate of the move the market expects, in either direction.

Example: a $100 stock reports tonight after the close. The $100 call costs $4.75 and the $100 put costs $4.60. The straddle is $9.35, about 9%, so the market is pricing a range near $91 to $109. That is an estimate, not a limit.

IV crush, worked through

Implied volatility (IV) is the part of an option's price that reflects expected movement. It climbs before a report and falls sharply once the news is out. That drop is called IV crush.

Take the same call at $4.75, with 14 days to expiry and IV at 60%. The stock rises 3% to $103 the next morning. You were right on direction. But IV falls to 30%, and the call is now worth about $4.20. That is a loss of $0.55 per share, or $55 per contract. Breakeven that morning was about $103.75.

Hold through, or close before

A stop order does not protect shares through a gap. If your stop is $95 and the stock opens at $85, the stop becomes a market order and fills near $85. An option buyer holding through needs a move big enough to beat IV crush.

Closing before the report gives up a possible gain to skip a coin flip. Some traders take a middle path and trim to a size where a gap against them is a loss they can live with.

How the tickets flag it

When a report is coming up, the ticket shows a chip such as "Earnings Oct 28 AMC". On an options ticket, if the report falls on or before expiration, the chip turns gold and adds "inside this expiry". That usually means the option is still open when the news lands, so it carries IV crush risk. Dates can shift, so confirm on the company's investor relations page.

Try this

Pick two stocks on your watchlist that report in the next few weeks. Write down the date, BMO or AMC, and the straddle price for the first expiry after the report. Afterward, compare the real move to the expected one and note what the option prices did. Paper only, no money needed.

Example option prices use the Black-Scholes model at a 4% interest rate, rounded. Real quotes vary. Trading around earnings can lose money, and option buyers can lose 100% of the premium paid.