Trading Opportunities in Options After Quarterly Results

Published on: February 3, 2025

The earnings season is here. But do you know that you can trade quarterly earnings results using options strategies? 

That is exactly what this blog can teach you. It’s a quick-read brimming with insights. Do remember to share it with your fellow options traders to help their journey.  

Let’s get to it! 

As earnings announcements approach, options premiums tend to rise, leading to an increase in Implied Volatility (IV).   

We use the Implied Volatility Percentile (IVP) to gauge this volatility –  

• IVP closer to 100 indicates that options premiums are at their highest in the past year

• IVP closer to 0 suggests they are at their lowest

Let us take the price and IV chart of INFOSYS for example.

In this case, both the IV and IVP rise as the earnings announcement nears.   

Typically, after the announcement, there is a sharp decline in IV and options premiums. 

The Opportunity 

The phenomenon of the rising options premiums before an earnings event and their subsequent collapse afterward presents a trading opportunity for you! 

You can capitalise on this using short volatility options strategies after the earnings announcement like the “Short Straddle” with other strategies like Short Strangle, Iron Condor, and Iron Fly.    

 These strategies profit when volatility decreases post-announcement, resulting in lower options premiums. 

To validate this approach, we backtested the Short Straddle strategy on the top 15 stocks in F&O (Futures & Options) sorted by market capitalization over the last five years.  

Here is how we did it –   

• Entry: Initiate a short straddle by selling one ATM call option and one ATM put option one day after the earnings announcement at 9:20 AM.

• Exit: Close the position 10 days later at 3:20 PM.

• Margin Requirement: A margin of ₹2,00,000 is needed to execute this strategy.

• Backtesting Period: Over five years without stop-loss or target price considerations.

What Backtesting Reveals? 

The backtesting results show total profit and loss (P&L), total returns, win rate, profit factor and expectancy. 

The findings reveal a robust system with  

• Average win rate of 68%

• Average profit factor of 2.44

• Average returns around 38%.

Notably, fourteen out of fifteen stocks were profitable. That is how you know it works. 

Let us go back to the INFOSYS example.  

Backtesting for our Short Straddle strategy over the last five years gives us the distribution of PNL of the trades over the last 5 years. You also get a detailed list of trades outlining – 

• Entry and exit dates

• Strike prices chosen

• Combined entry and exit prices

• Individual P&Ls

• Returns as a percentage of premiums received.

Here is the list of some of the trades of the short straddle strategy with the above-mentioned factors. 

These results highlight the effectiveness of short volatility strategies like the Short Straddle.  

However, it is crucial to remember that past performance does not guarantee future results.   

 Additionally, strategies like Short Straddle and Short Strangle carry undefined risks and should be approached with caution—particularly by inexperienced traders.   

 For those seeking defined risk strategies, alternatives like Iron Fly or Iron Condor may be more suitable.   

Ease Backtesting with OPTEST 

 Backtesting is both an art and science which needs a platform that can adapt to your needs.  

 That is why we have OPTEST for you – a platform which helps you do Intraday, Positional & Custom  backtesting, highlighting all that you need to know to be a better trader.  

 Try OPTEST Today 

Keep an eye on our Blogs page for more insightful blogs like this one. 

We are also sharing investment-worthy stocks from quarterly results based on fundamental and technical analysis. It can help you save days’ worth of analysis.  

Check us out on X to know which ones they are!