With earnings season in full effect, traders are chasing opportunities where they think premium is either too expensive or too cheap based on their outlook for the event.

As outlined in the past on the tastytrade network, corporate earnings announcements are usually accompanied by a run-up in implied volatility - especially in the expiration month that captures the release.

This increase in implied volatility is due to the fact that earnings are somewhat unpredictable, and can potentially cause big moves in the underlying stock.

Even if you’re already an advanced trader of earnings, some new research produced by tastytrade should be of interest.

Today we're looking at earnings from a new angle - specifically the potential for selling premium after an earnings event has passed. On the surface, that premise may appear counterintuitive, so bear with us for a few moments.

It's true that historical data demonstrates quite clearly the "earnings crush" is real. A recent tastytrade study highlighted that implied volatility can drop as much as 40% in the wake of earnings.

However, one must also keep in mind that the conclusion of the earnings event also means that the company in question has theoretically released "all" pertinent information to the market. This is because earnings typically include financial data from the most recent quarter, ongoing forecasts for business prospects, as well as any other important corporate developments/initiatives that are announced in conjunction with earnings.

If you believe in the integrity of the company in question, then it's likely you also believe that the earnings translate to a "comprehensive" release of all relevant market information. That also means that in the near future, barring an unexpected event/occurrence, the perception of the company's value isn't like to change drastically.

Following that logic, one might further assume that the period between earnings releases, particularly right after the event, might be a relatively “quiet” period for the stock.

It is, however, important to note a couple caveats to the above line of thinking:

  1. A company can announce potentially impacting news at any time

  2. Big moves in the broader financial markets can sometimes catalyze big moves a given underlying

Naturally, you’re now probably wondering how a short premium approach has historically performed after earnings. Luckily for us, tastytrade recently conducted a study on this very subject, and presented the results on a new installment of Market Measures.

The study included a short premium trade deployed after earnings (4 times a year) in five symbols over a 12 year period. The parameters of the study are listed in the bullet points below:

  • Studied the performance of short straddles after the “earnings crush”

  • Trade entry: end-of-day after earnings release

  • Symbols backtested: AMZN, IBM, GOOG, GS, AAPL

  • Period studied: 12 years

  • Total trades involved: 256

In order to gain the best possible understanding of this strategic approach, the Market Measures team decided to run a concurrent study for better context. In this second study, the team looked at how the opposite approach compared - buying premium after the earnings crush.

The graphic below highlights the results of the two studies - selling premium after the “earnings crush” versus buying premium after the “earnings crush:”

Slide 4

Did the findings above surprise you at all? Let’s take a closer look at the results...

First, let's focus on the two columns to the right in the slide above. As you can see, the winning percentage (win rate) for the short straddle approach after the “earnings crush” was attractive for all five symbols. We also see that 4 of the 5 symbols produced a positive average P/L.

In contrast to those results, we can see that the long premium approach after the “earnings crush” produced a win rate that was less than 50% in each of the 5 symbols backtested. Likewise, the average P/L for two of the symbols produced some outsized negative returns. Two of the symbols, GS and AAPL, did produce an average P/L that was positive - but one must keep in mind that this was after the “earnings crush,” which gives us a better idea of just how low implied volatility needs to go before a long premium approach gets attractive.

Overall, the most important takeaway from this study (in my opinion) is that the win rates for a short premium approach remain very high, even after implied volatility gets hammered. While the exact reason for this can’t be known exactly, the theory that earnings announcements remove some uncertainty from any underlying is probably at least partially valid.

We hope you’ll take the time to review the complete episode of Market Measures focusing on selling premium after the “earnings crush” when your schedule allows. If you decide that such an approach could fit in your own portfolio, you might “mock trade” this strategy prior to deploying it live, so that you can acquire experience managing trades of this type.

If you have any questions about trading earnings, we hope you’ll leave a message in the space below, or send us an email at support@tastytrade.com.

Thanks for reading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.


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