The IV crush is brutal. Even contracts four months out in time crush -30%:
Thought opening diagonal or calendar with long legs so far in time could avoid most of the IV crush, nope.
The IV expansion is brutal. Impossible to benefit from positive Theta decay:
Thought opening calendars couple weeks before earning's could overpower IV expansion as Theta decay ramps up last few days, nope not before earning's with IV expansion. Turns out the only profit I was making was capturing directional move pre-earning's, if there was one.
There is no edge selling on the day of earning's and going long:
Thought selling on day of earning's could capture big IV premium, helping offset long legs cost, gaining some advantage by placing long legs far out in time. Except they will crush accordingly too, the day-after you have same value as what's available on the open market. Literally only way to profit is capturing directional move pre-earning's, or if there's a big enough earning's pop to offset IV crush.
The only opportunity playing earning's is capturing pre-earning's directional move, or big earning's directional move. That's speculating:
Positive Theta decay or selling Theta goes out the window with IV expansion. Horizontal, diagonal, vertical spreads all of their short legs will not Theta burn with such IV expansion, but IV expansion will assist long legs as well somewhat to not Theta decay. It kinda freezes Theta. So directional move becomes your only friend, IV expansion becomes your main enemy, either move enough to profit or trade flat and lose to IV expansion as short legs become more costly to close prior to earning's.
Playing Earning's Sucks Unless…
The only harm not playing earning's is pretty much missing the big earning's pop, if there even is one. That's really gambling imo. Playing earning's is okay if reacting post, there's still lots of price action which can take place while avoiding the IV crush. Still, nothing's promised. Seems best to give oneself lots of time, buying maybe a month or two. If earning's are exceptional, buy bullish play but sells off then would have to double down, buying at the new lowered price, giving enough time for the big beat to reflect in price action which could take some time.
IV expansion and IV crush are variables not for beginners, not worth playing, better to react post. If anyone's effectively playing IV crush I'm all ears, probably double butterfly at implied move where can lose 7 and win 3 to still be in profit but that's too gambly for me. If have a solid approach am all ears, reacting post seems more appropriate from what have seen so far.
Playing Earning's Sucks. Update.
byu/breakyourteethnow inoptions
Posted by breakyourteethnow
8 Comments
Yeah most the time but if you play the right ones. Affirm did good for me. TRADEDESK did good for me Unity was alright. Zoom did good. Had a few loosers but looking back I did better then I thought
Finding an edge in the market is not easy. There’s a lot of smart people out there trying to find it.
This is why you sell options into ER. Harvest the IV crush at open the next day.
surprise surprise, earnings is gambling
You’ve laid out the challenges of trading around earnings really well, dude. IV crush can be brutal, especially when you think you’ve set up a strategy that should theoretically avoid it, like with diagonals or calendars. The IV expansion leading up to earnings and the subsequent crush really neutralizes a lot of the potential Theta decay benefits, making directional moves almost the only real play.
I’ve had similar experiences where I thought I could capitalize on high IV by selling on the day of earnings, only to see the premiums evaporate the next day, leaving me with little to show. It really does seem like reacting post-earnings is the safer bet, as you avoid that massive IV crush and can still catch some of the leftover volatility.
Do you had success with a different approach to IV crush around earnings? Maybe there’s a more nuanced strategy out there that minimizes the risk while still capturing some of that pre- or post-earnings movement. I’m curious to hear what’s worked (or hasn’t) for others in the communitty.
u/breakyourteethnow I have been trying to follow your diagonal strategy on earnings. I think it is a very interesting topic. I can’t say I fully get it, but I will comment based on the data you shared yesterday on NVDA in this thread:
[https://www.reddit.com/r/options/comments/1f3s7et/edge_over_market_playing_iv_crush/](https://www.reddit.com/r/options/comments/1f3s7et/edge_over_market_playing_iv_crush/)
Assuming I haven’t made any mistake:
Your call diagonal would have cost $1.89 yesterday and its value currently is $0.705. That’s a loss of $1.185.
Your put diagonal would have cost $0.96 yesterday and its value currently is $$2.04. That’s a gain of $1.08.
Net / net your overall position would be $0.105 today. Based on my assessment I think two things need to be done for you to make this a winning strategy:
1) Take a directional bet. There is no guarantee that your gain on the diagonal spread on one side will be greater than the loss on the diagonal spread on the other side.
2) Your choice of the short strike needs to be close / as close as possible to where the stock price lands post earnings. Essentially, you are aiming to have your short leg premium decay maximum while maintaining / increasing the premium of your long leg as much as possible.
verticals
You should still see some differential IV crush with calendars and diagonals. I’d say diagonals would be my favorite earnings play, opening with a modest debit with short leg <7 DTE and long leg 2 months+ away, constructed such that there is only one break-even point so you have protection in one direction.
Another one I like is a broken wing butterfly – similar idea without playing any IV. Constructed for a small credit to remove risk in one direction – but it’s basically a lottery ticket hoping the stock hit the short strike. You’d want to open this very close to expiry, ~1-2 DTE, as the extrinsic value won’t reduce until the very end.
You can see my go-to strategies always involve removing risk from one side completely, as binary events such as earnings is too unpredictable.