Trading Strategy
A practical playbook for trading US equities — with a focus on the riskiest, most rewarding event of the quarter: earnings.
Start here: the four questions
Ask these before any trade — earnings or otherwise.
- What is my edge? If you can't say it in one sentence, you don't have one.
- What is the implied move? The options market has already priced expectations — know the bar.
- What is my invalidation? The exact price/event where you're wrong and exit.
- What is the worst-case loss? Size so a full loss is survivable (typically 0.5–2% of account).
Factors to be mindful of around earnings
The variables that decide whether an earnings trade works.
- Implied move (IV): The straddle price ÷ stock price ≈ the expected one-day move. A stock priced for a 12% move that delivers 6% will fall on a "beat" because of IV crush.
- Whisper number vs consensus: The street's published EPS estimate is the floor, not the bar. Buy-side whisper numbers are usually 1–3% higher.
- Guidance, not the print: Forward guidance moves the stock 2–3× more than the headline beat/miss. Listen to the call, don't trade the press release.
- Positioning: High short interest + a beat = squeeze. Crowded longs + an inline print = sell-the-news.
- Sector read-throughs: Bellwethers (AAPL, NVDA, JPM, WMT) set the tone for peers reporting later that week.
- Macro overlay: A hawkish FOMC the morning after earnings will overwrite even a clean beat.
- Liquidity & gap risk: Most earnings move in the after-hours session with wide spreads. You cannot reliably stop out — assume you hold to the open.
Earnings strategies
Pick one that matches your edge, conviction, and risk appetite.
No-trade (the default)
The expected value of a random earnings trade is negative after spreads and IV crush. Sitting out is a position.
- Setup
- Close or hedge existing exposure 1–2 sessions before the print unless you have a clear thesis.
- Risk
- Opportunity cost only. By far the most underrated 'strategy'.
Pre-earnings drift
Stocks with positive momentum and rising estimates often drift up into the print as funds front-run good news.
- Setup
- Enter 5–15 sessions before earnings on names with rising analyst revisions and price > 50-day MA. Exit the day before the print.
- Risk
- Whole position closes before the binary event. Drawdown risk is normal market beta, not gap risk.
Short volatility (IV crush)
Implied vol always collapses after the announcement. Sell premium when IV is rich and you expect a move smaller than implied.
- Setup
- Sell an iron condor or short strangle outside the expected move, with defined risk. Close the morning after.
- Risk
- Tail risk is real — a 2× expected move (FB 2022, NFLX 2022) can wipe out months of gains. Always define risk.
Long volatility (straddle/strangle)
Some names systematically exceed their implied move (small caps, biotech, recent IPOs).
- Setup
- Buy a straddle when IV is cheap relative to historical realized move on prior prints.
- Risk
- Negative theta + IV crush. You need a move bigger than implied just to break even.
Post-earnings drift (PEAD)
Stocks that gap >5% on a beat tend to keep drifting for 30–60 days; misses fade further. Institutions rebalance slowly.
- Setup
- Wait one full session after the print. Enter on day 2 in the direction of the gap, exit on a close back through the gap fill.
- Risk
- False breakouts are common; use a stop at the post-print VWAP.
Pairs trade
Trade the read-through, not the reporter. If NVDA prints great, the AI suppliers (AVGO, MU) often catch up.
- Setup
- Long the laggard / short the leader when the spread between two correlated names hits a 2σ extreme.
- Risk
- Correlation can break under stress. Size each leg to the same dollar exposure, not the same share count.
Position sizing & risk math
The single biggest determinant of long-term survival.
- 1R = your max loss on the trade. Define it before you click buy. Never risk more than 1–2% of account equity on a single earnings trade.
- Use implied move as your stop budget. If implied move is 8%, don't enter a directional bet that requires a 12% rip to work.
- Half-position the night-before. Take half size into the print, add on confirmation the next morning if the thesis is intact.
- Avoid stacked binary risk. Don't hold three biotech earnings the same week — your "diversified" book is one bet in disguise.
Timing & execution
- Most quality names report after the close (AMC) or before the open (BMO). Know which, exactly.
- Avoid market orders in the first and last 10 minutes — spreads are widest then.
- Options expiring the same week of earnings carry the highest IV crush. Buying calls Friday for a Tuesday print = paying for vol you'll never use.
- For directional bets, longer-dated options (30–60 DTE) survive IV crush better than weeklies.
Risk controls that actually save you
- Hard daily loss limit (e.g. 4% of account). Hit it, walk away — no revenge trades.
- Pre-trade checklist: thesis, invalidation, size, exit. Written down, every time.
- Journal every earnings trade with the implied move, your forecast, the result. Patterns emerge in 20–30 prints.
- Never average down into an earnings loser. The next print is 90 days away.
Common mistakes
- Buying calls the day of the print "because the chart looks good." You're paying peak IV for one day of theta-decayed exposure.
- Confusing a beat with a trade. The bar isn't consensus — it's whisper + guidance + positioning.
- Holding through earnings on a thesis that has nothing to do with earnings ("I like the long-term story"). Hedge it.
- Overtrading earnings season. 200 names report in a week. You only need 2–3 good setups.
Using this terminal in your workflow
- Calendar & Heatmap — surface the week's catalysts and reporting density.
- Radar — ranks catalysts by AI impact score so you focus on the few that matter.
- AI Recommendations — synthesizes news, analyst actions, and insider activity into a directional read. Treat as a second opinion, never a signal.
- Watchlist — your shortlist of names where you actually have an edge.
This page is educational. Trading earnings is high-risk and most retail accounts lose money over time. Nothing here is a recommendation to buy or sell any security. Do your own research, size small, and consult a licensed advisor for personal financial decisions.