Why You Should Never Trade Options the Week of Earnings Reports

Earnings season is one of the most exciting times in the stock market. Every quarter, companies release their financial results, and those reports can cause massive movements in stock prices. A company that beats expectations might jump 10%, 15%, or even 20% overnight. A company that disappoints investors can crash just as quickly.

Because of these dramatic price swings, many traders are drawn to options trading during earnings week. The logic seems obvious: if a stock is about to move dramatically, why not buy calls or puts and profit from the volatility?

On the surface, it sounds like an easy opportunity.

But in reality, trading options during earnings week is one of the fastest ways to lose money in the options market.

Unless you are extremely experienced and understand exactly how options pricing works, getting involved in options around earnings announcements is usually a terrible idea.

The reason comes down to one simple concept: implied volatility and the volatility crush.

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Why Options Become Expensive Before Earnings

Before a company releases its earnings report, traders expect the stock to move significantly. Nobody knows whether the move will be up or down, but they do expect it to be large.

Because of that uncertainty, options become much more expensive in the days leading up to the announcement.

This happens because implied volatility increases.

Implied volatility represents the market’s expectation of future price movement. When traders expect big swings, they are willing to pay more for options contracts.

As a result, call options and put options both become inflated.

Even options that are far out of the money suddenly carry large premiums.

For traders who don’t understand the mechanics behind this, it can look like an opportunity.

But what’s actually happening is that the options market is pricing in the expected move ahead of time.

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The Market Already Knows the Stock Will Move

One of the biggest mistakes new options traders make is assuming that a big move automatically means profit.

For example, imagine a stock trading at $100 right before earnings. A trader might buy a $105 call option expecting the stock to jump after the report.

But what many traders don’t realize is that the options market has already priced in the expected move.

If the market expects the stock to move $10 in either direction, that expectation will already be reflected in the option premiums.

This means the option may already be priced as if the stock will move significantly.

So even if the stock does move, it may not move enough to overcome the inflated premium that was paid for the option.

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The Volatility Crush

After the earnings report is released, something dramatic happens to the options market.

The uncertainty disappears.

Traders no longer have to guess about the earnings results because the information is now public.

As a result, implied volatility collapses almost instantly.

This phenomenon is known as volatility crush.

And it can destroy the value of options contracts within seconds.

When volatility collapses, option prices drop—even if the stock moves in the direction you predicted.

This is the part that shocks many new traders.

They correctly predict the direction of the stock, yet their option still loses money.

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When Being Right Still Loses Money

Let’s look at a simple example.

Suppose a stock is trading at $100 before earnings.

You buy a call option for $5 because you expect the stock to jump.

After the earnings report, the stock rises to $103.

You were correct. The stock went up.

But because implied volatility collapsed after the announcement, the option you bought might now be worth only $2.

Even though the stock moved in the correct direction, the option lost value because the volatility premium disappeared.

This happens constantly during earnings season.

And it leaves many traders confused and frustrated.

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Why Both Calls and Puts Lose Value

Another surprising reality about earnings week is that both calls and puts can lose money simultaneously.

Before the announcement, both types of options are inflated because traders are anticipating a large move.

Once the report is released, that anticipation disappears.

Implied volatility falls sharply, which reduces the value of both sides of the options chain.

If the stock doesn’t move far enough in either direction, both call buyers and put buyers lose money.

This is why many experienced traders avoid buying options around earnings entirely.

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The Stock Must Move Far More Than Expected

For an earnings trade to be profitable when buying options, the stock usually has to move much more than the market expects.

But expectations are already baked into the option pricing.

For example, if the options market expects a $10 move in either direction, the stock may need to move $15 or $20 before buyers actually profit.

Moves of that size do happen occasionally.

But they are rare.

Most earnings moves fall within the expected range that the options market has already priced in.

When that happens, option buyers lose money.

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Why Professional Traders Often Sell Options

Because of volatility crush, many professional traders actually take the opposite side of earnings trades.

Instead of buying options, they sell options.

When they sell options before earnings, they collect the inflated premiums created by high implied volatility.

After the earnings announcement, volatility collapses.

That collapse causes option prices to drop, allowing the seller to buy the contracts back at a lower price.

In other words, professional traders are often betting against option buyers during earnings week.

They take advantage of the volatility premium that inexperienced traders are willing to pay.

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The Lottery Ticket Mentality

Another reason traders lose money during earnings is because options start to feel like lottery tickets.

A small investment can potentially turn into a huge gain if the stock makes a large move.

For example, a $200 call option could suddenly be worth $2,000 if the stock explodes upward.

Stories like that spread quickly on social media.

But what those stories rarely show is how many traders lost money trying to make the same bet.

The majority of earnings trades simply don’t produce the extreme price moves necessary to generate large profits.

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Earnings Moves Are Unpredictable

Another problem with trading options during earnings is that earnings reactions are extremely unpredictable.

Even when companies report strong results, the stock may still fall.

This happens because markets don’t react only to the numbers themselves.

They react to expectations.

A company may beat earnings estimates but still disappoint investors if future guidance is weak.

Conversely, a company might report mediocre results but rally because expectations were even lower.

Trying to predict these reactions consistently is extremely difficult.

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Time Decay Adds Another Problem

Options during earnings week also suffer from time decay, also known as theta.

Many traders buy very short-term options that expire the same week as the earnings report.

But the closer an option gets to expiration, the faster its value declines.

So even if the stock moves slightly in the right direction, time decay may still eat away at the option’s value.

When combined with volatility crush, this can produce extremely rapid losses.

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The Bottom Line

Earnings season creates huge excitement in the stock market, and the potential for big moves can make options trading look incredibly attractive.

But the reality is that buying options during the week of earnings is one of the most dangerous strategies for inexperienced traders.

Before the announcement, options become extremely expensive due to high implied volatility.

After the announcement, volatility collapses in a phenomenon known as volatility crush.

This collapse can destroy the value of options almost instantly—even when the stock moves in the correct direction.

In many cases, the stock must move far more than the market expects just for option buyers to break even.

Because of this, many professional traders prefer selling options rather than buying them during earnings week.

For most investors, the safest approach is simple.

Stay away from options during earnings week.

Because while the potential gains may look exciting, the odds are heavily stacked against you.