Earnings Play Strategy

Without an edge, yes - any single result is roughly 50/50 on direction. However, edge exists in: understanding IV dynamics (crush, run-up), historical analysis (some stocks consistently move more/less than expected), and proper strategy selection. The key is systematic analysis over many trades, not guessing on individual events. Even with edge, position sizing must account for high single-trade variance.

Options are priced on expected volatility. Results create genuine uncertainty - the stock could gap significantly either direction at the open. This uncertainty (risk) commands premium. Think of it like insurance before a storm - prices rise because the risk is real. After results, uncertainty resolves and prices normalise. This predictable pattern (expensive before, cheap after) is what creates trading opportunities.

It depends on the strategy. Defined-risk strategies (iron condors, debit spreads, long straddles) have a maximum loss equal to the debit paid or the spread width minus credit. You cannot lose more. Undefined-risk strategies (short straddles, naked options) can lose far more than the initial margin - a 15% gap against you is catastrophic, and on American-style stock ETOs the short legs can also be assigned. Always use defined-risk strategies unless you're an expert with robust risk management.

For beginners, consider exiting before to avoid binary risk. Playing the IV run-up captures predictable gains without betting on the announcement outcome. If holding through, accept that it's binary - either you win or lose significantly. Use defined-risk strategies, size at 50% of normal, and don't bet more than you can afford to lose. As you gain experience and develop a genuine analytical edge, you can increase through-results exposure.

Look for: high option liquidity (tight spreads, decent open interest), predictable IV patterns (consistent behaviour over results), and a sufficient expected move to make strategies worthwhile. In Australia, focus on the most liquid ETO names: BHP, CBA, CSL, the other major banks (NAB, WBC, ANZ), RIO, FMG, Macquarie, WiseTech and Wesfarmers. These have the most active options. Avoid illiquid names where wide spreads eat your edge.

Track for each result: stock price before/after, expected move (ATM straddle the day before), actual move (gap + day's range), IV before and after (crush magnitude), your prediction vs the outcome. A spreadsheet or database works. Collect 4+ results before trading (≈2 years given semi-annual reporting). Sources: ASX option-chain data, the ASX Market Announcements Platform for dates, your broker's historical data. After building, calculate: average expected vs actual, win rates for different strategies, and the best setups by stock.

Use historical analysis. If the expected move is consistently > actual (overstated), the iron condor has edge - sell premium expecting a smaller move. If expected < actual (understated), the long straddle has edge - buy premium expecting a larger move. Check the last 4-8 results. If mixed or no clear pattern, skip the trade or use small size. Also consider: the iron condor is higher probability but loses more when wrong; the long straddle is lower probability but wins more when right.

For IV run-up plays: enter 5-10 days before, exit 1-2 days before. IV typically starts rising meaningfully 5-7 days out. For through-results plays: enter 1-3 days before to minimise theta burn while capturing elevated IV. Avoid entering more than 2 weeks out - too much theta decay before the event. For post-results plays: enter within 30-60 minutes of the open when IV has crushed but may still be slightly elevated.

Reduce individual sizes to keep total results exposure under 10%. If you normally risk 3% per trade, reduce to 2% each when running 3-4 concurrent results. This is especially important when trades are correlated (same sector, or the same week of reporting season). Also consider staggering entries/exits to avoid all positions being decided simultaneously. Correlation during reporting season is higher than normal.

If defined-risk (iron condor, spread): follow your pre-planned rules. If the loss exceeds your stop, close. Don't rationalise holding because 'it might come back.' For an iron condor testing a wing: either close the entire position or close the tested side only. Don't add to losing results positions - the event is over. If undefined-risk (short straddle): close immediately if the loss approaches your maximum acceptable loss. Results gaps don't reverse reliably.

Compare the current surface to historical results surfaces. Check: 1) Term structure steepness vs average (an opportunity if steeper), 2) Put-call skew vs historical (an opportunity if wider), 3) Strike skew pattern vs normal. Build a database of pre-results surfaces over 4+ results. Statistical comparison reveals when the current surface deviates significantly. Deviation = opportunity. Also compare implied to realised vol history - if IV is at 60% but the stock never moved more than 30% on results, that's rich premium to sell.

Methods include: 1) Index hedges - buy XJO index puts to protect against a market-wide reporting-season selloff (A-VIX isn't separately tradeable at retail), 2) Pair trading - if long premium on one stock, short on a correlated stock, 3) Position correlation management - limit concentration in similar stocks, 4) Cash buffer - keep 30-40% of the results allocation in cash for adjustment/recovery. Most importantly: sizing discipline. No hedge replaces proper position limits.

Sell the front-expiry (results) ATM straddle, buy the back-month ATM straddle. The front expiry has elevated results IV (sell rich); the back month has normal IV (buy fair). After results, the front IV crushes while the back month stays stable - the spread narrows profitably. Key considerations: adjust ratios based on term structure steepness, consider a slight directional tilt if you have a view, and place stops based on underlying movement (not just spread value). Best when the term structure is unusually steep. Note weeklies (useful for the short front leg) exist only on the XJO and ~20 active stocks.

Benchmark against: 1) A random strategy - what would random long straddle/iron condor selection produce? Your edge should exceed this, 2) Buy-and-hold - does results trading beat just holding the underlying? Adjust for volatility, 3) Risk-adjusted returns - the Sharpe ratio for results vs other strategies, 4) Maximum drawdown - how bad are losing streaks? Track over 20+ results (which, given semi-annual reporting, spans several years) for statistical significance. The edge should be 3-5% annually above random after costs to be meaningful.

Key differences: 1) Reporting frequency - Australia reports SEMI-ANNUALLY (half-year in February, full-year in August) rather than quarterly, so roughly half the events per stock and two concentrated seasons; 2) Timing - Australian results are released pre-open or under a trading halt (the move is an opening gap) vs US after-hours; 3) Liquidity - Australian single-stock options are less liquid (wider spreads, lower OI, concentrated in the top-20 names); 4) Weekly options - limited to the XJO and ~20 stocks (unlike the deep US weekly market); 5) Assignment - stock ETOs are American-style and Australian dividends are often declared with results, so short ITM calls face early-assignment risk around ex-dividend dates; 6) Bank cadence - CBA reports in August/February while NAB, WBC and ANZ report in November/May. Adapt US techniques but calibrate to Australian data and the semi-annual calendar.