When earnings season rolls around, options traders start watching volatility levels like hawks. Stocks like TSLA, AAPL, and NVDA often see implied volatility (IV) surge in the days before results, only for it to collapse immediately after. That sudden drop, known as the earnings IV crush, can wipe out the value of options even when the stock moves in your favour.
In this article, we’ll break down why volatility spikes before earnings, why it collapses afterwards, and how to trade the move intelligently. You’ll also see how automated strategies can help you time and execute volatility trades with consistency.
What is earnings volatility?
Earnings volatility refers to the market’s expectation of how much a stock will move when it reports results. The more uncertain traders are about the outcome, the higher the implied volatility.
Before every major earnings event, options prices rise because traders are willing to pay more for protection or speculation. That additional cost represents the volatility premium, essentially a measure of market anxiety.
For example, if AAPL is trading at $200 and options imply a ±5% move for earnings, that expected range is built into the price. If the stock only moves 2%, the options were overpriced, and the extra premium disappears immediately.
Understanding this dynamic is key to trading earnings effectively. The opportunity lies not in guessing the number, but in anticipating how volatility itself will behave.
Why IV spikes before earnings (and crashes after)
Implied volatility reflects uncertainty. As earnings approach, uncertainty rises, so IV expands. Once the event passes and the results are known, uncertainty vanishes, and IV collapses.
Here’s how the cycle typically plays out:
- Two to three weeks before earnings. Traders begin buying calls and puts to speculate on direction or hedge exposure. Market makers raise premiums to balance that demand, causing IV to climb steadily.
- One to two days before earnings. IV reaches its peak. At this stage, options are at their most expensive relative to the stock’s recent history.
- Immediately after earnings. IV drops sharply as traders unwind positions and new information is priced in.
This pattern happens every quarter, across almost every liquid stock. The catch is that the directional move in the stock rarely compensates for the drop in IV, which is why buying options before earnings can be so costly.
Suppose you buy a TSLA call option for $10 with IV at 90%. Earnings come out, the stock rises modestly, but IV collapses to 55%. The call might still be worth only $6 because the volatility premium has evaporated.
That’s the IV crush in action: predictable, ruthless, and avoidable with the right approach.
Trading before earnings: buy or sell the spike?
The most common question traders ask is whether to buy or sell options ahead of earnings. The answer depends on your edge and risk tolerance, but understanding both sides helps you decide.
Buying volatility
When you buy volatility, you’re betting that the stock will move more than the market expects. This is a high-risk, high-reward approach.
- Works best when IV is low compared to its historical average (check IV Rank or IV Percentile).
- Strategies include long straddles, long strangles, or directional debit spreads.
- Requires a significant post-earnings move to overcome time decay and the volatility crush.
For instance, if NVDA has IV Rank around 30 and options imply a ±4% move, a surprisingly large earnings gap could lead to an outsized payoff. But if the move is smaller or IV drops faster than expected, you’ll lose even if you’re right on direction.
Selling volatility
Selling volatility means you’re betting that the stock’s actual move will be smaller than implied. This is the more consistent and statistically favourable approach, as earnings moves tend to be overestimated.
- Works best when IV is high relative to history (IV Rank > 60).
- Popular setups include short straddles, iron condors, and credit spreads.
- The goal is to collect premium while defining risk carefully.
For example, if AAPL options imply a ±6% move but historically average ±3%, selling an iron condor around the expected range can capture that excess premium once IV collapses.
Most professional traders lean towards selling volatility before earnings, not because it’s risk-free, but because probabilities tend to work in their favour over time.
Example trades: TSLA, AAPL, and SPX
Let’s look at how the earnings IV cycle plays out in real markets.
TSLA example
- Stock price: $250
- One week before earnings: IV rises to 85%, up from a 60% three-month average.
- Strategy: Sell an iron condor using 240/245 puts and 255/260 calls for a $2.00 credit.
- Outcome: After earnings, IV drops to 55%, and TSLA moves just $6 — less than implied.
- Result: Both sides expire worthless, and the trader keeps the full premium.
This kind of setup works because IV deflation, not direction, drives the profit.
SPX example
The same concept applies to SPX weekly options. Around macro events like CPI or FOMC meetings, implied volatility behaves almost identically to stock earnings cycles. The Weekly Premium strategy capitalises on this by selling defined-risk spreads in high-IV environments and closing them after volatility normalises.
This method works across multiple underlyings and timeframes, making it a scalable part of an automated system.
Executing volatility trades manually can be challenging. Timing matters, and emotions often lead to poor entries or exits. Automation helps eliminate that inconsistency.
An automated options strategy can:
- Scan for tickers with high IV Rank or upcoming earnings events.
- Open short premium positions (like credit spreads) three to five days before earnings.
- Automatically close positions at target profit or when IV collapses by a set percentage.
For instance, a script could monitor AAPL, TSLA, and AMD each quarter, identify when IV exceeds 70%, and deploy iron condors two to three days before results. Once IV drops 20% post-earnings, positions are closed automatically.
This kind of process enforces discipline and consistency — key ingredients in long-term profitability. Platforms like AutoShares, ThinkOrSwim API, or Interactive Brokers’ automation tools make this feasible without coding expertise.
The goal isn’t to remove human input but to ensure decisions follow predefined logic rather than emotion or guesswork.
Checklist: avoiding the earnings trap
Before placing your next pre-earnings trade, review this checklist to avoid common pitfalls:
- Analyse IV Rank and Percentile. Determine whether volatility is high or low compared to its own history.
- Compare implied move to past earnings moves. If the current implied move is much larger than average, selling volatility is often safer.
- Define your risk. Use credit spreads or iron condors instead of naked short options.
- Set clear exit rules. Don’t hold long premium through the event unless you expect a major surprise.
- Backtest and automate. Use historical data to refine your thresholds and automate repeatable setups.
The more systematic your process, the less likely you are to fall into the earnings trap.
Final thoughts
Trading around earnings is about understanding how volatility behaves. The earnings IV spike and subsequent crush are among the most reliable patterns in options trading.
By selling inflated premium before the event, defining your risk, and using automation to execute with precision, you can turn what frustrates most traders into a steady, repeatable edge.
To go further, explore related articles on this topic:
- IV Crush Explained: Why Option Prices Collapse After Earnings
- IV Rank vs IV Percentile: How to Measure Volatility Opportunity
