Earnings and event risk

Almost everything that moves markets arrives without warning. Earnings do not.

A results date is published weeks ahead. That makes it the one category of risk you can plan around completely — and the one most retail traders walk into by accident.

What the market does before an event#

As a known event approaches, uncertainty about the outcome rises. Options price uncertainty, so implied volatility rises into the event.

This shows up two ways:

Premiums inflate. Options covering the event date get more expensive, sometimes dramatically for single stocks.

Term structure inverts. The expiry covering the event prices higher IV than later expiries — the signal from the volatility lesson that the market expects something specific and dated.

Neither reflects a directional view. The market is not saying the result will be good or bad. It is saying the range of outcomes has widened.

The implied move#

You can extract what the market expects the stock to move. A rough approximation using the at-the-money straddle:

Expected move ≈ (ATM call + ATM put) ÷ spot price

If a stock trades at ₹1,000 and the ATM straddle covering results costs ₹80, the market is pricing roughly an 8% move in either direction.

That number is the single most useful thing you can know before an event, because it converts a vague sense of "this could move" into a threshold you can compare your view against.

IV crush#

The moment results are announced, uncertainty collapses. The outcome is known, and implied volatility falls hard — often within minutes of the open.

So an option bought before the event and held through it faces two opposing forces:

• Intrinsic value may rise if the stock moved your way
• Implied volatility falls sharply, which reduces the option's price regardless

When the move is smaller than the implied move, the second effect wins. This is why the archetypal event trade — buy calls before results, results are good, stock rises, calls lose money — happens so consistently.

Set days to 7, then move IV from 35% down to 18% without touching spot. That drop, with the underlying unchanged, is IV crush. It is what your position absorbs the instant the announcement lands.

The three positions#

Long premium (buying). Needs a move bigger than implied. You are betting the market has underpriced the uncertainty. Structurally difficult — you are paying the elevated price.

Short premium (selling). Collects the inflated premium and profits from IV crush. Wins most of the time and loses badly on the occasions the move exceeds implied. The classic small-consistent-gain, rare-large-loss shape, and it must be defined risk.

Flat. Close before the event. Costs you nothing but the opportunity, and removes a risk you cannot analyse.

That third option deserves more respect than it gets. If you do not have a specific view on the move relative to what is priced, holding through an event is taking a bet you have not analysed.

Index events#

Indices have their own scheduled events: RBI policy, inflation prints, GDP, the Union Budget, major global central bank decisions.

The mechanics are the same — India VIX rises into them and falls after — but two differences matter:

Index moves are smaller than single-stock earnings moves, because an index averages across constituents. The implied move on Nifty before a policy decision is a fraction of what a single stock shows before results.

Index heavyweight earnings move the index. During results season, when the largest constituents report, index volatility rises without any index-level event at all.

The routine#

Before holding any position overnight:

1. Is there a scheduled event before my exit? Results, policy, macro data.
2. What is the implied move? From the ATM straddle.
3. Does my view beat it? If not, there is no trade.
4. If I have no view on the move: am I flat, hedged, or knowingly gambling?

Four questions, under a minute, and they prevent the entire category of loss described in this lesson.

Check yourself

0 of 4 answered

1. 1.A stock trades at ₹1,000 and the ATM straddle covering results costs ₹80. What is the market pricing?

   An 8% move upwardA move of roughly 8% in either directionA ₹80 moveAn 80% probability of a rise

2. 2.You buy calls before results. The results are good, the stock rises 4%, and your calls lose money. The implied move was 8%. What happened?

   The broker mispriced the optionsThe move was smaller than implied, so IV crush outweighed the gain in intrinsic valueCalls cannot profit from good resultsThe stock should have risen more

3. 3.Why is holding an existing position through an earnings announcement a different trade from the one you entered?

   Exchanges change the lot size around resultsYou sized for normal daily volatility, but you are now exposed to a much wider distribution with the same position sizeOptions stop trading during announcementsMargin requirements are waived

4. 4.Near-month options price higher implied volatility than far-month options ahead of a results date. What is this called and what does it mean?

   A volatility smile — wing strikes cost moreAn inverted term structure — the market is pricing a specific, dated near-term eventContango — normal market conditionsA pricing error to arbitrage

What to take away

• Scheduled events are the one risk you can see coming.
• IV rises into an event and collapses after — that is IV crush.
• Extract the implied move from the ATM straddle. Your view must beat it, not just the result.
• Right on direction, smaller than implied = a losing trade.
• Three positions: long premium (needs a big move), short premium (defined risk only), flat.
• A position held through results is not the position you sized.
• Four questions before any overnight hold. Under a minute.