How to Trade Earnings Season

Earnings season in the stock market presents incredible opportunities for asymmetric trades (low risk/high reward). 

Given the huge price and volatility spikes for many stocks, you’ll want to have a solid plan with edge ready to deploy. Trading options will give you the most flexibility but stocks are fine too. 

Here’s some proven strategies for your plan:

#1: Earnings Are a Volatility Event First

Retail traders often focus on direction: “Will they beat or miss?” You should focus on volatility.

Academic research shows that implied volatility rises sharply before earnings and collapses immediately after the announcement—a phenomenon known as the volatility crush. Many options traders lose money even when they’re directionally right because they ignore this effect.

Quick Tip: There ARE two directional trades that DO work well. Learn more here.

#2: Define Risk Before the Announcement—or Don’t Trade It

Earnings can gap beyond stops. This is where you'll learn painful lessons.

Research on gap risk shows that traditional stop-loss orders provide limited protection during erratic price moves. You should compensate by:

  • Reducing size
  • Using defined-risk option strategies
  • Accepting that some events are simply untradeable

Quick Tip: If you can’t define and accept worst-case risk in advance, you’re gambling—not trading. Pass.

#3: Most Earnings Gaps Are Already Priced In

Markets are forward-looking. By the time earnings arrive, expectations are embedded in price, options premiums, and positioning.

Jack Schwager’s interviews with top traders repeatedly emphasize that the edge is not in predicting the news—but in understanding how the market reacts relative to expectations.

An “earnings beat” that sells off is not a paradox—it’s solid information.

Quick Tip: Plan to trade the reaction, not the report.

#4: Post Earnings Announcement Drift

Positive (negative) surprises tend to keep drifting up (down) for weeks to months, this is one of the most persistent anomalies in the market. 

Quick Tip: Buy strong positive-surprises; short strong negative-surprises after the release; hold for 20–60 trading days with risk caps.

#5: Fewer Trades, Higher Standards

The biggest earnings-season mistake is overtrading. Not every company is tradable. Not every setup deserves capital. Focus on:

  • Liquid stocks/options
  • Confluence with sector strength and direction
  • Prior earnings behavior
  • Alignment with broader market conditions

This selectivity echoes findings in behavioral finance: overconfidence and activity bias reduce returns, especially during high-volatility periods.

Final Thought

Earnings season exposes weak trading rules more than almost any other market environment. Trade smaller. Respect volatility. Define risk first. Let the market react before you do.

If you’re still unsure, watch this free training session and learn a solid strategy to implement this earnings season.

To your trading success,

Mike Siewruk

 

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