Navigating Earnings: The Wheel Strategy and Implied Volatility
Should you hold short options through earnings?
Earnings season can feel like a high-stakes game of roulette for options traders. Those fat premiums look so tempting, don't they? Your short puts and calls are suddenly worth a whole lot more as the market braces for the big announcement.
For most wheel traders, the best strategy around earnings is often no strategy at all: close your short options before the announcement. The risk of a massive price swing often outweighs the potential premium collected.
The Implied Volatility (IV) Rollercoaster
Here's the deal: options premiums are inflated before earnings because of something called Implied Volatility, or IV. It's the market's expectation of how much a stock price might move. When a big earnings report is coming, everyone expects a big move, so IV spikes.
This spike makes premiums look juicy. You might see a put that was paying $2 a month ago suddenly worth $5. It feels like free money, but it's really the market pricing in a ton of uncertainty.
The golden rule for short option sellers: High IV is your friend when you sell, but it's a double-edged sword when you hold through a catalyst.
The dreaded IV crush
The moment earnings are released, and often even in the hours leading up to it, IV crashes. This is known as "IV crush." All that uncertainty is gone, replaced by actual numbers. Suddenly, the market doesn't expect a huge move anymore, and option premiums deflate dramatically.
This crush can wipe out all the premium you collected, and then some, if the stock moves against you. Or, even if the stock stays flat, the value of your option might drop so fast that you barely profit, or even lose money if you bought to close.
Let's look at a hypothetical example for Apple (AAPL) just before an earnings report, with the stock trading around $175 and 30 days to expiration:
| Strike | Delta | Premium (Pre-Earnings) | Probability of Profit |
|---|---|---|---|
| $170 Put | 0.30 | $4.50 | ~70% |
| $165 Put | 0.20 | $2.80 | ~80% |
| $180 Call | 0.30 | $4.00 | ~70% |
That $4.50 premium on the $170 Put looks fantastic. But if AAPL drops to $160 after earnings, that put is suddenly deep in the money, and your $450 premium is a small comfort compared to the $1,000 loss per contract you're facing on assignment.
What to do instead
If you have open put or covered call positions on a stock reporting earnings, consider closing them before the announcement. Yes, you might leave some premium on the table, but you also sidestep the massive unknown.
- Close early. If you're near your 50% profit target, or even if you're not, it's often wise to take profits and run before earnings.
- Wait until after. A more conservative approach is to wait until a few days after earnings. Let the dust settle, let IV crush do its work, and then re-evaluate. You can then sell new puts or calls with much lower IV, making them safer bets.
- Roll out and up/down. If you absolutely must stay in the trade, you could roll your put out to a later expiration and a lower strike, or your call out and up. This might collect more credit, but it just pushes the risk further down the road, it doesn't eliminate the immediate earnings gamble.
The premiums on some of these speculative names look incredible, right up until the stock drops 40% on an earnings miss and suddenly you own 100 shares of something you'd never have bought on purpose.
The real risk: Assignment and directional gaps
The biggest risk for wheel traders holding through earnings is getting assigned shares at a much higher or lower price than you intended. A stock can gap up or down 10% or more overnight, completely blowing past your strike price.
If you're selling cash-secured puts, a massive earnings miss could mean you're assigned shares far below your original cost basis target. If you're selling covered calls, a huge beat could mean your shares are called away at a price that leaves you with less profit than you wanted, or even a loss if the stock gapped above your cost basis and you sold below it.
ThetaPal helps you track your positions and P&L, but even the best tracking won't save you from a huge earnings gap. It just shows you the damage in real-time.
A final thought on earnings and the wheel
The wheel strategy is about consistent, high-probability income generation over time. Playing earnings with short options introduces a high-probability, high-impact risk event that often goes against the core philosophy of the wheel. Stick to what works: patience, managing risk, and letting theta decay do its job on non-event driven premiums.