Earnings announcements can create big opportunities – and risks – in options trading. Here’s what you need to know:

• Implied Volatility (IV) spikes before earnings because of market uncertainty, driving up option premiums.
• After earnings are announced, IV drops sharply (known as “volatility crush”), often reducing option values by up to 30%.
• Pre-earnings strategies like buying straddles or strangles can profit from rising IV.
• Post-earnings strategies like selling options (short straddles/strangles) take advantage of the IV drop.

Key takeaway: Plan your trades carefully. Use historical IV data, manage risks with proper position sizing, and avoid emotional decisions. Timing is everything when trading around earnings.

Understanding Implied Volatility in Options Trading

What Is Implied Volatility?

Implied volatility reflects the market’s expectations of future stock price swings, as seen in current option prices. When traders anticipate significant price movements, implied volatility rises; when they foresee steadier activity, it declines.

In pricing models like Black-Scholes, higher implied volatility increases option premiums. For traders in Singapore dealing with stocks like CapitaLand or Keppel Corp, this metric plays a key role in pricing decisions.

Unlike historical volatility, which analyses past price movements, implied volatility looks ahead, capturing the market’s expectations rather than past trends. For example, earnings reports often lead to spikes in implied volatility because of the uncertainty they introduce. This forward-looking nature makes implied volatility a cornerstone for understanding how earnings events influence predictable volatility patterns.

Volatility Patterns Around Earnings

Implied volatility often follows a predictable cycle around earnings announcements. In the days leading up to the release, implied volatility typically rises as traders brace for potential surprises in earnings results, changes in guidance, or unexpected market reactions.

Studies indicate that implied volatility increases by about 14% before earnings announcements. This surge is driven by heightened options activity, with institutional and retail investors either hedging risks or speculating on price swings.

Take, for example, Intel’s earnings announcement on 15 July 1997. At-the-money call options saw implied volatility peak at 71.15% before the release, only to plunge to 42.96% afterward. This is a textbook case of the “volatility crush”.

The timing of these patterns is strikingly consistent. Short-term options, particularly those expiring shortly after the earnings announcement, experience the sharpest swings in implied volatility. In contrast, options with longer expiration dates are less affected since the earnings event represents a smaller fraction of their overall time value.

Once the earnings are announced, the uncertainty that drove implied volatility higher dissipates. Regardless of whether the results exceed or fall short of expectations, the resolution of uncertainty causes implied volatility to drop significantly. This “volatility crush” can sharply reduce option values, even if the stock price moves as predicted.

How Volatility Crush Affects Options Prices

In the world of options trading, a phenomenon called volatility crush can sharply reduce option premiums once the uncertainty surrounding earnings announcements is resolved. This happens because, with the release of earnings results, the market’s anticipation and speculation come to an end. Even if the stock moves in line with expectations, the steep drop in implied volatility can eat away at the option’s premium.

Before earnings are announced, traders often drive up option premiums, pricing in the potential for surprises. However, as soon as the announcement is made, this “uncertainty premium” disappears almost instantly. This means that even if your prediction about the stock’s direction is correct, the loss in extrinsic value caused by the fall in implied volatility might cancel out your gains.

Effects on Call and Put Options

Volatility crush impacts both call and put options significantly. For example, if you buy call options on DBS Group Holdings, expecting strong quarterly results, a modest increase in the stock price might not be enough to offset the sharp drop in implied volatility after the announcement. Similarly, if you purchase put options on Singapore Airlines, anticipating disappointing results, the premium tied to pre-earnings uncertainty could vanish post-announcement. This could lead to losses even if the stock moves in your favour.

Because of these risks, many seasoned traders avoid buying options right before earnings announcements. Understanding how volatility crush works is crucial to navigating these specific price dynamics effectively.

Factors That Influence Volatility Crush

Several factors influence the extent of volatility crush, including company size, market liquidity, and timing.

• Company Size: Larger, well-established companies tend to experience smaller drops in implied volatility compared to smaller firms. For instance, blue-chip stocks like Singapore Telecommunications or CapitaLand might see more moderate declines, while mid-cap growth companies could face sharper reductions.
• Market Liquidity: Highly liquid options markets, characterised by tight bid-ask spreads, often exhibit more efficient pricing. This can help moderate the extent of the volatility drop.
• Pre-Announcement Expectations: When the market anticipates major surprises or shifts in guidance, implied volatility can spike to extreme levels. This sets the stage for a larger decline once the uncertainty is resolved.

Historical trends also play a part. Stocks that have shown significant price swings after past earnings announcements may retain relatively higher implied volatility even after results are released. On the other hand, companies with a track record of stable, predictable earnings often experience a sharper contraction in implied volatility as uncertainty dissipates quickly.

Timing is another important factor. For Singapore-listed companies, earnings announcements made during periods of broader market instability or alongside major regional news can see implied volatility influenced by broader market conditions, adding another layer of complexity to the volatility crush.

Pre-Earnings Options Strategies: Trading Opportunities

Earnings season often brings a surge of activity in the options market, offering traders opportunities to profit from predictable volatility patterns. These strategies focus on both the rise in implied volatility (IV) before earnings and its sharp drop immediately after announcements. By understanding and leveraging these movements, traders can approach earnings season with a structured game plan.

Strategies to Benefit from Rising Volatility

To take advantage of increasing implied volatility, traders often turn to long straddles and long strangles. These strategies involve buying both call and put options, capitalising on the IV spike that typically occurs before earnings announcements.

• Long Straddle: This involves purchasing a call and a put option at the same strike price, usually at-the-money. For instance, if Singtel shares are trading at S$2.50 ahead of earnings, you could buy both a S$2.50 call and a S$2.50 put. This strategy profits as long as the stock makes a significant move, regardless of direction.
• Long Strangle: Similar to a straddle, but the call and put options are at different strike prices. For example, you might buy a S$2.60 call and a S$2.40 put. Long strangles are cheaper to execute but require larger price swings to be profitable.

Both strategies are driven by the uncertainty premium that builds as the earnings date approaches. The closer the announcement, the higher the implied volatility, as markets anticipate surprises in results or reactions.

Strategies to Profit from Volatility Crush

On the flip side, strategies like short straddles, short strangles, and covered calls are designed to capitalise on the rapid drop in implied volatility that occurs after earnings announcements.

• Short Straddle: This involves selling both a call and a put option at the same strike price, collecting premiums while IV is high. For example, if CapitaLand shares remain stable post-earnings, the IV drop can cause both options to lose value quickly, allowing the seller to buy them back at a lower price or let them expire worthless.
• Short Strangle: Similar to a short straddle, but the options sold are out-of-the-money, giving the stock more room to move while still generating a profit. However, the premiums collected are typically lower.
• Covered Calls: In this strategy, you own the underlying shares and sell call options against them. For instance, Singapore Airlines shareholders might sell covered calls before earnings, collecting premium income that benefits from the post-announcement IV drop.

“Success in trading is not just about making decisions; it’s about making informed decisions.” – Collin Seow

These strategies work because the uncertainty premium evaporates almost immediately after earnings are released. This allows option sellers to profit even if the stock price moves only slightly.

Using Historical Data to Plan Trades

Historical data plays a crucial role in fine-tuning these strategies. By analysing past IV patterns and earnings outcomes, traders can make informed decisions about when to enter and exit trades. This systematic approach helps remove emotional biases, leading to more consistent results over time.

For example, historical data shows that IV increases of over 15% are not uncommon for certain companies, with an average rise of about 10.4% across actively traded firms. Singapore-based traders should focus on SGX-listed companies with sufficient options liquidity – such as major banks, REITs, and telecom stocks – and review at least 8–12 quarters of historical data to identify recurring patterns.

A systematic method involves comparing current IV levels with historical averages for the same company and timeframe. If current IV is significantly lower than historical pre-earnings levels, it might indicate an opportunity for long volatility strategies. Conversely, if IV is unusually high, short volatility strategies could be more effective.

Collin Seow Trading Academy advocates for this data-driven approach, teaching traders how to structure their trades by focusing on what to buy, when to buy, and how much to invest. This disciplined framework is especially valuable during earnings season, helping traders navigate opportunities while managing risks effectively.

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Risk Management and Trading Considerations

Trading options during earnings announcements demands a disciplined approach to risk management. Earnings surprises can lead to sharp price swings, and having solid risk controls in place is crucial to safeguard your capital while still taking advantage of earnings-driven opportunities.

Position Sizing and Diversification

Getting your position size right is critical when trading during earnings season. The heightened volatility around earnings can turn even seemingly low-risk trades into significant losses if your positions are too large.

A good rule of thumb is to risk no more than 1-2% of your portfolio on any single earnings trade. For instance, if your portfolio totals S$50,000, allocate S$500 to S$1,000 per trade. This way, even if you encounter multiple losing trades, your overall portfolio remains protected.

“The question of how much to buy is central to managing investment risk. Collin’s approach emphasises strategic position sizing, which involves determining the appropriate investment amount for each trade based on an individual’s risk tolerance and the trade’s risk-reward profile. This careful calculation helps traders manage their exposure to risk while optimising their portfolio’s growth potential.” – Collin Seow, Top-tier Remisier at Phillip Securities, Founder of CollinSeow.com

Diversification is another layer of protection. Spread your trades across various sectors and earnings dates to avoid overexposure. Instead of focusing solely on tech stocks like Sea Limited or Grab, consider adding options from other sectors available on SGX. For example, include major banks like DBS or UOB, real estate investment trusts (REITs) such as CapitaLand Integrated Commercial Trust, or telecommunications players like Singtel.

Also, avoid concentrating all your trades around the same earnings dates. Staggering your trades across different weeks during the earnings season can shield you from the ripple effects of broad market sentiment shifts following major announcements.

Next, take liquidity into account to further manage risk.

Monitoring Liquidity and Bid-Ask Spreads

Singapore’s options market often faces liquidity challenges, which can widen bid-ask spreads – especially during earnings season. When uncertainty peaks, these spreads can grow significantly, increasing trading costs and making it harder to exit positions efficiently.

Before entering a trade, check the daily volume and open interest for the options contracts you’re considering. Avoid contracts with very low liquidity or unusually wide spreads. For example, if a DBS call option has a bid of S$1.20 and an ask of S$1.60, the S$0.40 spread represents a significant cost that could eat into your profits before the trade even begins.

To maintain control over execution prices, use limit orders instead of market orders. In illiquid markets, market orders can result in poor fills that harm your trade’s profitability. Aim to set your limit order near the midpoint of the bid-ask spread and adjust as needed if the market moves against you.

Keep an eye on these spreads throughout the life of your trade. As earnings announcements approach, spreads can change quickly. If they widen excessively, it might be better to close your position early rather than risk limited exit options during the announcement itself.

Once you’ve minimised trading costs and managed liquidity risks, focus on planning your exits effectively.

Planning Exit Strategies

Having a clear exit strategy is essential when trading around earnings. The rapid shifts in stock prices and implied volatility during this time make it vital to set predetermined exit points, helping you avoid emotional decision-making.

Establish stop-loss (e.g., 30% below your entry price) and take-profit (e.g., 50% above your entry price) levels based on percentage moves rather than fixed dollar amounts. Use trailing stops to lock in gains while still benefiting from potential upside. Trailing stops automatically adjust as the market moves in your favour, maintaining a set distance from the current price to secure profits while allowing for further growth.

Timing your exits is equally important. Many traders close their positions immediately after earnings announcements to benefit from the “volatility crush”, while others may hold longer if the stock’s movement aligns with their strategy. Reviewing historical data for your target companies can provide insights into typical post-earnings price behaviour, helping you make informed exit decisions.

Disciplined exit planning, as taught by resources like Collin Seow Trading Academy, is a cornerstone of effective risk management. A systematic approach can prevent common mistakes, such as holding onto losing positions for too long or prematurely closing profitable trades due to emotional reactions. By sticking to your plan, you’ll be better equipped to navigate the unpredictability of earnings season.

Using Systematic Trading Education for Better Results

Navigating options volatility during earnings season demands a disciplined approach and a solid understanding of key concepts like implied volatility, volatility crush, and the Greeks. To master these, a structured trading education is crucial. Studies suggest that psychological discipline often outweighs technical analysis in achieving consistent trading success. A systematic approach not only helps traders seize opportunities but also minimises risks during the turbulence of earnings-induced volatility.

A well-organised trading education equips traders with the tools to understand and manage the complexities of options trading during earnings announcements. It also helps avoid common pitfalls like emotional decision-making and misreading volatility patterns. This approach is particularly relevant in Singapore, where financial literacy is growing, and a disciplined mindset is highly valued in trading.

Trading Resources for Earnings Season

Collin Seow Trading Academy offers a range of educational resources designed to guide traders on what to buy, when to buy, and how much to buy during earnings season.

The Market Timing 101 E-Course focuses on precise entry and exit strategies for earnings trades. Since implied volatility often increases by about 14% leading up to earnings and then drops sharply afterward, knowing the right timing can mean the difference between profit and loss.

For those seeking a broader foundation, the Systematic Trading Profits Live Webclass introduces a 3-Phase Growth System aimed at reducing emotional bias during volatile periods. This free resource provides practical strategies tailored for options trading during earnings season.

Additionally, the academy’s flagship book, The Systematic Trader v.2, offers in-depth guidance on options strategies, including a step-by-step framework called “4 detailed steps to creating your own ‘Options Income Fortress’”. The materials are tailored for traders in Singapore, incorporating local examples, currency formatting, and addressing challenges like liquidity and regulatory considerations specific to the SGX.

These resources provide a strong educational foundation, paving the way for disciplined and consistent trading outcomes.

Benefits of Systematic Trading Methods

Systematic trading methods bring a range of advantages when dealing with the volatility that comes with earnings season. Unlike emotional or spur-of-the-moment decisions, these methods rely on predefined rules and quantitative analysis, helping traders stay disciplined during periods of market stress.

One major benefit is the reduction of emotional bias. Systematic trading enforces predetermined exit strategies, which is especially critical during rapid drops in implied volatility. Options can lose up to 30% of their value due to volatility crush if volatility remains low post-announcement. By sticking to a systematic plan, traders can avoid knee-jerk reactions and focus on long-term consistency.

These methods also allow traders to take advantage of predictable volatility patterns. Historical data reveals that over 42% of companies experience heightened volatility during earnings releases. By using backtested strategies and historical implied volatility data, systematic traders can anticipate these patterns and position themselves effectively.

“His approach is not just about making successful trades but about cultivating a disciplined, informed, and strategic mindset among his students.” – CollinSeow.com

The academy’s systematic approach emphasises strategic position sizing, aligning with each trader’s risk tolerance and the risk-reward profile of individual trades. This focus on managing exposure is essential when dealing with the amplified risks of earnings-season volatility.

Moreover, systematic trading offers consistency across various market conditions. Whether employing straddles to benefit from pre-earnings volatility spikes or setting up iron condors to take advantage of post-earnings volatility crush, traders using systematic methods rely on tested procedures rather than making impulsive decisions.

The academy enhances this learning with real-world case studies and step-by-step guides. These resources help traders interpret key metrics like historical volatility trends, earnings surprise statistics, and post-announcement volatility crush data. By following these methods, traders not only mitigate risks but also build confidence to execute trades effectively during the unpredictable earnings season.

Conclusion: Trading Earnings Announcements with Confidence

Trading around earnings announcements requires a solid understanding of implied volatility (IV) patterns and a disciplined approach. Typically, IV increases before earnings as market uncertainty grows, only to drop sharply after the announcement as that uncertainty resolves.

To navigate these dynamics effectively, precise positioning is crucial during earnings season. Pre-earnings strategies like straddles and strangles can take advantage of rising IV, but it’s often wise to exit these positions before the announcement itself to avoid the post-earnings volatility crush.

Equally important is disciplined risk management. This means sizing your positions based on your risk tolerance, diversifying across different sectors, and keeping a close eye on bid-ask spreads. For traders in Singapore, additional considerations, such as SGX trading hours, liquidity challenges, and currency factors involving the Singapore Dollar (SGD), add complexity. Analysing historical IV trends for specific stocks can provide valuable insights, helping you make informed decisions rather than emotional ones.

“Success in trading is not just about making decisions; it’s about making informed decisions.” – Collin Seow, Trading Expert

The methods taught at Collin Seow Trading Academy focus on eliminating emotional bias by guiding traders on what to buy, when to buy, and how much to buy. This systematic approach equips traders with the structure needed to handle the uncertainties of earnings season confidently.

Whether your strategy involves capitalising on rising volatility or preparing for the post-earnings IV drop, success comes from consistently applying proven techniques. The academy’s tools, such as The Systematic Trader v.2 and live webinars, offer the knowledge base to turn earnings season into a time of calculated opportunities rather than stress.

FAQs

What strategies can traders use to manage risks from a volatility crush after earnings announcements?

A volatility crush often happens right after earnings announcements when implied volatility takes a sharp dive, which can significantly impact the value of options. To handle this challenge, traders can explore these strategies:

• Use option spreads: Strategies like straddles or strangles can limit potential losses while keeping the door open for profits if the stock makes a big move.
• Close positions before earnings: Exiting your trades before the announcement can help you avoid the effects of a volatility crush.
• Prioritise risk management: Commit only a small portion of your capital to earnings trades and establish clear stop-loss levels to protect yourself.

Understanding how earnings influence volatility is a key part of making smarter trading decisions. If you’re looking to improve your approach, platforms like Collin Seow Trading Academy offer valuable resources to help you sharpen your skills and gain confidence in managing these market events.

What should traders look for in historical implied volatility data when preparing for earnings announcements?

When examining historical implied volatility data before earnings announcements, it’s important to look for patterns of volatility spikes around similar past events. These patterns can give you a sense of how the market typically reacts to earnings reports. Keep an eye on the size of implied volatility changes – does it increase sharply as the announcement date nears? This can offer valuable insights into market expectations.

It’s also helpful to compare implied volatility (IV) with historical volatility (HV). This comparison can reveal whether options are priced higher than usual, signalling heightened market anticipation. By understanding these trends, you can better gauge potential price movement and refine your options strategies. Just remember, always align your approach with your risk tolerance and trading objectives.

How do a company’s size and liquidity affect the volatility drop after earnings announcements?

Companies’ size and liquidity play a big role in how much volatility crush occurs after earnings announcements. Bigger, well-established companies with high liquidity usually see smaller dips in volatility. This happens because their earnings are more predictable and draw in a lot of market participation. On the other hand, smaller or less liquid companies often experience sharper changes in volatility. This is due to the higher uncertainty and the lower trading activity that surrounds their earnings reports.

For traders, these factors are worth paying attention to during earnings season. They can directly affect options pricing and shape your risk management strategies. By understanding these patterns, you’ll be better equipped to make smarter decisions and handle market shifts more confidently.