Earnings implied move vs actual move: how to tell if options are overpriced
Earnings is the one scheduled event where the options market states its forecast in the open. The expiry just after the report prices a jump that the expiry just before it does not. Separating that jump from the everyday range, and comparing it with what the stock has actually done on past reports, is the whole game in earnings trading. This guide shows how.
Step 1: read the two expiries
Suppose a stock reports Thursday after the close. The Thursday expiry ends before the news; the Friday expiry contains it. On the calculator, look at both rows:
| Expiry | Days | Expected move |
|---|---|---|
| Thursday (before the print) | 3 | 2.1% |
| Friday (after the print) | 4 | 7.4% |
The Friday row is not 7.4% because of one extra day of ordinary trading. It is wide because it contains the report.
Step 2: isolate the earnings move
Variances add, so the earnings jump is what remains after the ordinary daily variance is removed:
With the numbers above: the ordinary component over 4 days is 2.1% × √(4/3) = 2.42%. Then √(7.4² − 2.42²) = √(54.8 − 5.9) = 7.0%. The market is pricing a 7.0% one-standard-deviation jump on the report itself.
A quicker approximation when the two expiries are a day apart and the stock is not especially volatile: the earnings move is roughly the Friday straddle minus the Thursday straddle, as a percentage of the stock. It is usually within a few tenths of a percent of the exact figure.
Step 3: compare with history
Pull the stock's last eight reports and note the absolute close-to-close move on the day after each. Two comparisons matter:
- Average realised vs implied. If the stock has averaged a 4.5% move and the chain implies 7.0%, options are expensive relative to history. If it has averaged 9%, they are cheap.
- How often realised beat implied. Count the reports where the actual move exceeded the implied move at the time. For most large-cap names it is around one in three, which is exactly what a one-standard-deviation quantity should produce. Materially higher and the market habitually underprices this name; lower and it habitually overprices it.
Be honest about the sample. Eight reports is a small number, and one 20% day inside it changes the average by 2.5 points.
Step 4: decide the trade type
Selling the event
If the implied move is well above the historical average and the stock has a habit of staying inside it, the classic trade sells a strangle or iron condor with short strikes at or outside the implied move, entered just before the close on report day and exited at the next open. The edge is the implied-realised gap; the risk is the one report in three that breaks the range, which is why defined-risk structures (condors, not naked strangles) are the norm for retail.
Buying the event
If the implied move is at or below the historical average, buying a straddle needs the stock to move more than the straddle cost after the volatility collapse. Post-earnings IV crush typically removes 30% to 50% of the pre-report premium the next morning, so the straddle does not simply need a move equal to its price; it needs a move well beyond it. Most "the stock moved 6%, my straddle lost money" stories are this effect.
Trading the direction with defined risk
A call spread or put spread with the long strike near the money and the short strike at the implied move takes a directional view while selling back the most expensive part of the chain. It caps the win at the implied move, which is a reasonable place to cap it.
What the numbers cannot tell you
Which way. Nothing in the chain reliably predicts direction; skew (puts costing more than calls) reflects hedging demand more than expectation. Whether guidance, not the quarter, will drive the reaction. Whether a large realised move will be a gap or a drift through the session. The implied move is a ruler for the size of the reaction, and that is all it claims to be.
Where to read it
The home page lists this week's higher-importance reports; each links to the stock's page, where the row after the report date carries the wider range. The methodology explains why every row uses the same one-standard-deviation definition, which is what makes the before-and-after comparison valid.