Some of the best earnings trading opportunities happen before the actual report is released. Pre-earnings strategies let you profit from volatility expansion and price momentum without taking on the binary risk of the earnings announcement itself. In this guide, we will show you how to trade the run-up to earnings.
Why Trade Before Earnings?
The period leading up to earnings creates unique market dynamics that savvy traders can exploit. Implied volatility rises as uncertainty increases, stocks often trend in anticipation of results, and you can exit before the actual announcement eliminates the guessing game.
Key advantage: Pre-earnings strategies let you capture profits from volatility expansion and directional moves while avoiding the unpredictable outcome of the actual earnings report.
Understanding Pre-Earnings Volatility
Implied volatility (IV) typically starts rising 1-2 weeks before an earnings announcement. This happens because options traders price in the expected move from the upcoming report. As the earnings date approaches, IV continues climbing until it peaks just before the announcement.
The IV Expansion Cycle
- 2-3 weeks out: IV begins to rise gradually above normal levels
- 1 week out: IV acceleration increases as earnings approach
- Day before: IV reaches peak levels
- After earnings: IV collapses (IV crush) regardless of direction
Pre-Earnings Strategy 1: The Volatility Run-Up Play
This strategy profits purely from the increase in implied volatility, not from directional moves. You buy options when IV is relatively low and sell them when IV expands before earnings.
Example: AAPL Volatility Play
Apple reports earnings in 10 days. Current IV is 25%, but historically it rises to 40% before earnings.
- Buy an at-the-money straddle (call + put at same strike)
- Cost: $8.00 per share ($800 per contract pair)
- Hold for 7-8 days as IV expands
- Sell before earnings when IV reaches 38-40%
- Expected profit: 15-25% from IV expansion alone
Keys to Success
- Enter when IV rank is below 30% (relatively cheap options)
- Choose stocks with predictable IV expansion patterns
- Exit 1-2 days before earnings to avoid IV crush
- Use at-the-money options for maximum vega exposure
Pre-Earnings Strategy 2: Directional Momentum Trade
Many stocks develop a directional bias in the weeks before earnings. This can be due to analyst upgrades, sector trends, or anticipation of strong results. You can capture this momentum with a directional options position.
Identifying Pre-Earnings Momentum
Look for these signs that a stock may run into earnings:
- Recent analyst upgrades or positive estimates revisions
- Strong performance from sector peers who already reported
- Technical breakout from consolidation pattern
- Unusual call buying activity (bullish flow)
- Historical tendency to rally into earnings
Example: Bullish Pre-Earnings Trade
NVDA has earnings in 2 weeks. Analysts just raised estimates and the stock is breaking out.
- Buy a call spread to limit cost and IV crush impact
- Purchase the $500 call for $15.00
- Sell the $520 call for $8.00
- Net cost: $7.00 ($700 per spread)
- Maximum profit: $13.00 ($1,300) if stock reaches $520
- Exit before earnings if target is reached or time runs out
Pre-Earnings Strategy 3: Calendar Spread
A calendar spread profits from the difference in IV between near-term and longer-term options. Before earnings, the front-month options have much higher IV than the back-month options.
How It Works
You sell the expensive near-term option (high IV) and buy the cheaper longer-term option (lower IV). After earnings, the front-month IV collapses while the back-month IV remains stable.
Example: Calendar Spread Setup
Stock XYZ reports earnings on January 25th.
- Sell the January 26th $100 call (IV: 80%)
- Buy the February 16th $100 call (IV: 45%)
- Net debit: $2.50 per share
- Profit if stock stays near $100 and front-month IV collapses
Pre-Earnings Strategy 4: Selling Premium Before the Crush
Some traders sell options before earnings to capture the elevated premium, then close before the actual report. This works because IV is high, making options expensive to buy and profitable to sell.
Important: This strategy requires closing before earnings. If you hold through earnings, you take on unlimited directional risk from the binary outcome.
Iron Condor Pre-Earnings
Sell an iron condor 5-7 days before earnings when IV is elevated. Close the position 1 day before the report for a quick profit from theta decay and IV remaining stable.
Risk Management for Pre-Earnings Trades
Pre-earnings strategies have specific risks you must manage:
- Early earnings release: Companies occasionally report early, catching traders off guard
- News events: Guidance updates or analyst downgrades can move stocks before earnings
- Timing risk: IV may not expand as expected or may peak early
- Liquidity: Bid-ask spreads can widen as earnings approach
Position Sizing Guidelines
- Limit each pre-earnings trade to 2-3% of your account
- Set a maximum loss threshold and honor it
- Do not hold more than 3-4 pre-earnings positions at once
- Always have an exit plan before entering the trade
Finding the Best Pre-Earnings Opportunities
Not all stocks are good candidates for pre-earnings trades. Look for these characteristics:
- Liquid options: Tight bid-ask spreads for clean entry and exit
- Predictable IV patterns: Consistent volatility expansion before past earnings
- Reasonable option prices: Options not already too expensive
- Clear technical picture: Identifiable support and resistance levels
- Sufficient time: At least 5-7 days before earnings to capture IV expansion
Common Mistakes to Avoid
Even experienced traders make these pre-earnings errors:
- Entering too early: IV expansion is not linear, so entering 3+ weeks out may not work
- Holding through earnings: Forgetting to close and getting hit by IV crush
- Ignoring the spread: Wide bid-ask spreads eat into profits
- Overconfidence in direction: Pre-earnings momentum can reverse quickly
- Wrong strike selection: Out-of-the-money options may not benefit from IV expansion
Track Your Pre-Earnings Performance
Pro Trader Dashboard helps you analyze your earnings trades and identify which pre-earnings strategies work best for your trading style.
Summary
Pre-earnings trading offers opportunities to profit from volatility expansion and directional momentum without the binary risk of holding through the actual report. Focus on stocks with predictable IV patterns, manage your position sizes carefully, and always exit before the earnings announcement. With practice, pre-earnings strategies can become a consistent part of your trading toolkit.
Want to learn about trading after the report? Check out our guide on post-earnings drift or explore earnings straddle strategies.