Earnings season is here and we’ve got the first batch of big name companies reporting earnings next week with Taiwan Semiconductor (TSM), JP Morgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS) and Delta Airlines (DAL) all set to report.
Earnings season can supercharge option premiums. But not all setups are worth chasing.
The key is narrowing your focus to a handful of trades where risk and reward are actually in your favor.
Here’s a framework to help you identify high-quality setups, avoid traps, and capitalize on elevated implied volatility.
Start With IV Rank
Implied volatility is always higher into earnings, but that doesn’t mean it’s high enough.
Use IV Rank to filter for stocks with rich premium.
I look for IV Rank > 50%, but ideally 70% or higher.
That tells me the current IV is elevated relative to the past year. These are the names where options are most overpriced.
Avoid tickers with low IV Rank, even if they have earnings coming up.
Focus on Liquid Names
You can’t trade tight spreads on illiquid options.
Liquidity matters, especially with earnings trades where you might need to adjust quickly.
Screen for tickers with:
-
Tight bid/ask spreads (preferably under $0.20)
-
Open interest above 500 contracts on near-term strikes
-
Total call option volume over 5k contracts
This keeps slippage low and execution tight.
If you’re trading multi-leg strategies like iron condors or butterflies, liquidity isn’t optional—it’s mandatory.
Choose the Right Strategy for the Setup
There’s no one-size-fits-all approach to earnings trades.
Strategy choice depends on the expected move, the volatility crush, and your directional bias (if any).
-
Neutral bias + high IV: Consider iron condors or straddles. Sell premium and play for a post-earnings volatility collapse.
-
Bullish bias + high IV: Sell put spreads or naked puts just outside the expected move. These often perform well when a stock beats modest expectations.
-
Bearish bias + high IV: Use call credit spreads or bearish calendars. Watch for crowded long setups—disappointment can cause outsized moves lower.
The best trades are structured outside the expected move range.
