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There’s a trade that pays whether the stock goes up or down.
You don’t guess the direction. You don’t guess whether they beat or miss earnings. The company reports, the stock moves, and you get paid either way.
It’s called a strangle, and most of the people who put one on before earnings lose money.
Both of those things are true, and the gap between them is worth understanding before you ever place one.
You buy two contracts on the same stock with the same expiration date.
One is an out-of-the-money call, which pays if the stock runs. The other is an out-of-the-money put, which pays if it drops.
Both strikes sit away from where the stock is trading, so both contracts are cheap compared to buying at the money.
Earnings act like a pressure cooker. A company reports revenue and guidance, and everything the market has been guessing about gets settled at once.
A blowout can send a stock up 20% or 30% before the opening bell, and a bad miss or weak guidance can cut it in half overnight.
AppLovin (APP) lived that on August 5. Revenue grew 53%, profit grew 55%, and the stock still shed nearly a fifth of its value by the next morning.
Holding a strangle, you don’t care which one you get. You care that the move is big enough to beat what you paid.
Before earnings, options get expensive. Everybody expects a wild ride, and that expectation is priced in as implied volatility.
The moment the report drops, the uncertainty is gone and those prices collapse. That’s the IV (implied volatility) crush.
It’s the same logic as hurricane insurance the week a storm is forecast to make landfall. Everyone can see it coming, so the premium is already priced for it. Once the storm passes, that premium is gone, whether the roof held or not.
Which means the stock has to move further than the market already expected, and the price of those options was telling you the number the whole time.
Be careful here, because that bar is higher than it looks. The market prices these moves for a living, and it’s right more often than it’s wrong.
Most earnings strangles lose, and they lose on nights where the stock moved and the trader still didn’t get paid.
Take a stock at $100 the afternoon of its report.
Thirty minutes before the close, you buy the $105 call for $1.50 and the $95 put for $1.50. Three dollars total, or $300 for the pair.
That $300 is your maximum risk, and you lose all of it if the stock sits between $95 and $105 through expiration.
Your expiration breakevens are $108 on the upside and $92 on the downside. Anything between those two and you’re underwater at expiry.
Here’s what you need to make it a good night.
The next morning the company beats and raises guidance, and the stock opens at $120.
The put is finished. Your right to sell at $95 with the stock at $120 is worth nothing, and the $150 you paid for it is gone.
The call is worth at least $15 a share on intrinsic value alone, which is $1,500 on the contract. It’ll be worth more than that with time left, but $15 is the floor.
Sell both and you’ve turned $300 into $1,500, which is $1,200 of profit and a 400% return overnight.
One winner covered the loser completely and left the rest on the table.
The strategy and the math are both real. What gets people is the frequency.
You need a move the market didn’t already expect, and most quarters it expects correctly. Size these accordingly, and never put on a strangle with money you cannot afford to watch go to zero.
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One earnings report can wipe out more value than most entire companies are worth. In February 2022, META reported earnings that disappointed investors. The stock fell so hard that the company lost about $232 billion in a single day. At the time, that was the biggest one-day loss for any company in stock market history. Be careful out there.
