Trading Mistakes to Avoid – Playing ERs

Feel like hitting the casino and putting all your money on red or black? You might want to trade earnings releases instead and save yourself the flight.

Earnings releases (ERs) are super exciting—and dangerous—because of the opportunity to profit from a huge gap up, or down, while you sleep. The lure of quick profits from a big post-earnings move can be irresistible. But here’s the reality: playing ERs is more gambling than trading. Whether you’re trading stocks or options, the risks often outweigh the potential rewards because if you bet wrong, your account can take a significant hit.

Trading Stock

Trading stocks through ERs might seem like a straightforward play. Buy before the announcement, and if the company beats expectations, watch the stock soar. Easy, right? Wrong.

Most earnings announcements come after the market close and are often followed by gaps. That means the price jumps straight to a new level, leaving you no chance to manage your position. If it gaps in your favor, great! But if it gaps against you, you’re stuck holding a massive loss, without much recourse other than to bail and lick your wounds or wait until regular trading hours and hope for a reversal. Guessing which way an ER will go is a coin flip at best. Even the institutions get it wrong, but they’ve usually hedged their positions to manage their risk. You most likely haven’t.

Of course, if you’re holding for the long term, then a blown ER probably won’t matter as much, unless it destroys your fundament or technical trading thesis. But for a short term trade, you’re rolling the dice and playing with fire that you can’t manage.

An account crippling ER trading mistake I made was playing DELL earnings a while back. Similar companies in the sector where beating their numbers and surging, so i figured it was a sure thing to bet on DELL doing the same. I also liked the chart setup and I noticed some call flow ahead of the release. So I doubled my usual stock position size the day before ER. Needless to say, DELL disappointed and plunged around 15 points. The drop continued during regular trading hours and I sold on a break of a support level and booked a hefty loss, which made a material dent in my account. it didn’t put me out of business or even cripple me, but it did set me back financially and psychologically. On the bright side, it was an important lesson learned and a mistake I haven’t repeated since.

Trading Options

If trading stock ahead of earnings is like betting red or black, trading options ahead of ER is like placing the same bet with the dealer taking half your money regardless of the outcome. The reason for that is IV crush.

Leading up to earnings, the implied volatility (IV) on options spikes as the market makers, who are selling the options, anticipate big moves and increase options premiums to cover their outsized risk. That makes options super expensive right before earnings. After the earnings release, IV drops like a rock—often regardless of the direction the stock moves, sucking those hefty premiums right out of your options contracts. This phenomenon, known as the IV crush, can obliterate your option’s value even if the stock moves as you predicted.

Let’s use Netflix (NFLX) as an example—a stock notorious for its big post-earnings moves.

Imagine it’s the day before Netflix’s Q2 earnings report. The stock is trading at $400 and you’re bullish, expecting a blowout quarter. You buy one $410 call option expiring that Friday for $15 per contract, or $1,500. The stock technically needs to move above $425 ($410 strike price + $15 premium) for you to start making a profit. You’re feeling like it’s a sure thing.

Netflix releases its earnings after the market close. The numbers are good, and the stock jumps $20 to $420 in after-hours trading—just as you hoped. But when the market opens the next day you check your option and realize something strange: it’s worth just $8 now, or $800.

Wait—Netflix went up, so why are you losing money?

Here’s what happened:

Before earnings, market makers jacked up the option’s implied volatility (IV) to 80% in anticipation of a big move. That IV spike is what made the option so expensive, at $15. Once the earnings were announced, the uncertainty was gone, causing IV to drop to 40%, cutting the option’s premium in a big way. Even though the stock moved $20 in your favor, the drop in IV wiped out most of your option’s value.

To add to that, while a $20 move sounds big, it wasn’t big enough. Market makers had priced in an expected move of $25 (based on the inflated IV), so the actual $20 move was considered “underwhelming.” That left your $410 call deep in the red despite the stock’s rise.

If you’d bought Netflix stock instead of the option, your $20 gain per share would’ve made you a solid profit. But because you played the option, the IV crush left you with a loss—even though you were right about the direction.

This example shows how trading options ahead of earnings isn’t just about guessing the direction—it’s about overcoming the double whammy of expensive premiums and the IV crush. That’s why buying options prior to ER as a directional bet on the stock move stacks the odds heavily against you from the start and is strongly discouraged. Even if the stock makes a big move, the IV crush will significantly stunt your profit, or even wipe it out completely. A better options strategy for trading ERs would be to sell premium in credit spreads. Selling premium is an advanced strategy because it shifts the odds slightly in your favor by taking advantage of IV crush. But it’s not without risks—if the stock makes a larger-than-expected move, your losses can still add up quickly. It’s a trade only for those who truly understand how to manage spreads and calculate risk.

If your buying contracts with several months until expiration, IV crush will not have as crippling of an effect, depending on the ticker and the amount of time you have on the contract. But in any case, unless you’ve already been holding the stock for the long term, getting in just ahead of ER of just gambling.

Bottom Line

ERs are unpredictable. Even the institutions get them wrong, but they make sure to hedge their bets.  While playing them might seem like a quick way to make big money, in most cases it’s a fast track to crippling your account. Even worse is playing them with short term options, which will always suffer from IV crushes, even if the stock goes in your direction. If you want to gamble, just use money that your ready and willing to lose and have a blast. If you want to trade an ER, better to wait until after the release and the IV crush to get in.