During earnings season, companies that release their earnings may experience a surge in stock prices or a drastic drop, with fluctuations possibly reaching 30% or more.

For options, volatility itself is value; the greater the volatility, the more opportunities there are for options, which is why many investors use earnings season to engage in options trading. Compared to stocks, the advantage of options is that even if the direction of movement is guessed incorrectly, there is still a possibility to earn money, and they offer the ability to leverage a small investment and hedge risks.

Of course, the risks associated with options are also significant, and participation requires appropriate determination and strategy. Therefore, before operating, it is essential to clarify two questions: what characteristics does this period have? What strategies are more suitable for earnings season in different times and scenarios?

Everyone can take a rough look at the following chart; more details will be elaborated in the text below.

You need to know about IV during the performance period!

*This article will try to be as straightforward and understandable as possible, but if some parts are indeed difficult to comprehend, it may be necessary to supplement with some basic knowledge of options. The following courses are recommended:"Basic Options Knowledge". Alright, let's continue reading below, and revisit areas that require supplementary study.

During the earnings season, in addition to the actual significant fluctuations of the stock price itself, the IV of options usually experiences substantial changes.

What is IV? It can be understood as the market's expectation of the range of stock price fluctuations over a certain period of time. If the IV is 30%, it indicates that the market expects the stock price to rise and fall within a range of 30% over the next period.

How does IV affect options prices (that is, options premiums)? Options prices have a positive correlation with IV; generally speaking, other conditions being equal, the higher the IV, the more expensive the options prices.

*This is because the price of options consists of time value and intrinsic value. The intrinsic value refers to the value that can be obtained when exercising immediately (derived from comparing the underlying stock price and the option's strike price), while the time value is the cost paid for uncertainty. IV affects the time value, with higher IV representing greater uncertainty, thereby increasing the time value.

How does IV specifically change during the earnings season? Simply put, in the 1-3 weeks prior to earnings, uncertainty is high, and IV rises rapidly; after the earnings announcement, IV quickly drops, resulting in an IV Crush.

Thus, different trading ideas emerge.

One approach is related to IV, either being bullish on IV or bearish on IV.

When predicting that IV is about to rise, be bullish on IV in hopes of profiting from the actual rise in IV. Buying Single Options (long a call or long a put) is the easiest strategy to understand for being bullish on IV, while Long Straddle and Long Strangle are also common strategies for being bullish on IV, as they consist of buying a call + buying a put.

However, it is also necessary to note: on one hand, IV may not necessarily move in the direction you expect it to rise; it could also potentially fall. On the other hand, even if IV rises, if the stock price moves in the opposite direction of the option bet, the intrinsic value may decrease, or if there is initially no intrinsic value, it may be further away from having intrinsic value. Additionally, as time progresses, the time decay of the option can lead to a significant decline in time value, in which case the option price may not increase but rather decrease.

Doing bear IV is the opposite, hoping to profit from the decline of IV. Common strategies for bear IV include shorting a Single Option, shorting a Long Straddle, and shorting a Long Strangle, etc. However, it is equally possible that IV does not move as expected or that the stock price diverges from the direction of the option bet.

*This article will not elaborate too much on specific explanations and applications of individual strategies, but nearly all the strategies mentioned in this article can be found in"Advanced Options Strategy Knowledge"In this course, you can find answers; if there are any questions, further learning can be done in this course.

The second type is related to the actual volatility of the stock price, which involves trading volatility or trading bear volatility.

This understanding may be relatively easier, as mentioned earlier, it is possible to make money without guessing whether the stock will rise or fall, as long as there is a relatively accurate judgment of the stock price's volatility.

When anticipating a significant volatility in the stock price, trading volatility is done. Representative strategies include Long Straddle and Long Strangle, which essentially involve trading in both directions, where profits from one side can cover the costs of the other side when the range of stock price volatility is large enough.

On the contrary, when the expectation is that the stock price volatility will narrow, a typical strategy for trading volatility is to short a straddle and short a strangle.

The third type is directional trading, which is based on the determination of bullish/bearish/no bullish/no bearish.

Representative strategies include four Single Option strategies: buying a call when bullish (Long Call), buying a put when bearish (Long Put), shorting a call when not bullish (Short Call), and shorting a put when not bearish (Short Put).

Additionally, there are 4 types of vertical spread options strategies that are also quite typical. This strategy consists of 2 options with different strike prices but the same expiration date, related stocks, contract quantities, and types (Call or Put).

The bullish strategy consists of the Bull Call Spread and the Bull Put Spread. The former uses buying a call to realize bullish expectations while selling a call reduces the cost of buying a call. The latter involves selling a put to express a non-bearish expectation while buying a put reduces the risk of selling a put.

The bearish strategies are Bear Call Spread and Bear Put Spread; the former uses selling Calls to express a neutral expectation while buying Calls to reduce the risk of selling Calls, and the latter uses buying Puts to express bearish expectations while selling Puts to reduce the cost of buying Puts.

These strategies can also be further distinguished: Bull Call Spread and Bear Put Spread belong to aggressive strategies, or buyer strategies, while Bull Put Spread and Bear Call Spread belong to defensive strategies, or seller strategies.

With the explanations above, discussing performance strategies at different stages becomes much easier.

It can be viewed in three stages: 1-3 weeks before the earnings report, 1 day before the earnings report, and after the earnings release.

1. 3 weeks to 1 day before the earnings report

At this time, it is important to focus on managing IV. However, some strategies can be combined with other ideas: integrating good IV with directional trading, for example, buying a Single Option, or using more aggressive vertical option combinations; it can also be combined with good IV and good volatility, for example, buying a Long Straddle or buying a Bull Put Spread.

Here, let’s discuss the Calendar Spread / Diagonal Spread in more detail.

In simple terms, a Calendar Spread consists of simultaneously buying and selling options with the same strike price but different expiration dates, whereas a Diagonal Spread involves simultaneously buying and selling options with different strike prices and different expiration dates.

The profit logic of the former is that recent IV is high, time value decays quickly, while long-term IV is low and time value decays slowly, so selling short-term and buying long-term creates a price difference. The latter adds a directional determination to the purpose of the former.

In the 1-3 weeks leading up to the earnings report, some people use a calendar spread strategy, selling options that expire before the earnings report and buying options that expire after the earnings report; at this time, this is more of a strategy for maintaining IV. What is the logic behind it?

Because before the earnings report, the IV of options that expire around the earnings has already been pushed up, at this time, these options can be sold at a relatively high price, and they will expire soon, so the time value will decay rapidly, allowing for quick harvesting of time value. The purchased options can serve as a hedge, and as IV continues to rise, the price of these options may also increase, providing some flexibility on whether to hold them or not.

Of course, it's important to highlight the risks here:

• The strategies discussed here do not consider the situation of holding the underlying stock; if the underlying stock is held, then it follows a different logic. When engaging in such trades, it is important to avoid assets with insufficient activity as much as possible.

• A good strategy for IV can consider closing positions the day before earnings announcements or immediately after earnings releases to avoid IV Crush, and attention should be paid to whether it can offset negative effects from unfavorable stock price changes and time decay.

• For directional trading or trading volatility well, attention should be paid to whether favorable changes in stock prices can offset the negative impacts brought by time value and IV Crush.

2. On the day of earnings or the day before

Not much else to say, but let's explain the cross-expiration options combination a bit more. This is somewhat different from the cross-strike options combination in the 1-3 weeks before earnings. Selling options that expire after earnings on the day before earnings (for example, options that expire after earnings) and buying options with a longer expiration is due to:

The IV from the previous day has already been pushed very high, allowing the ability to sell options expiring after the earnings release at a higher price, and after the earnings release, the IV drops quickly, enabling a rapid realization of time value harvesting. Buying options with a longer expiration serves as a hedge as well, and it is less sensitive to IV fluctuations, and its time value decay is not as fast, so after the IV declines, its price changes may not be so significant. This combination thus generates profit from the price differential.

Of course, whether engaging in bearish IV, directional trading, or bearish volatility strategies, attention must be given to the negative impacts brought by unfavorable changes in stock prices and IV not changing as expected.

3. After the earnings announcement

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