Every quarter end marks an earnings season, a 45-day period when listed companies announce their financial results. Retail traders often experience excitement and agony during this time, which is frequently due to bad timing rather than bad luck. Institutions and smart money build positions based on research and expectations before result announcements, leading to stock movements even before results are released.
In the options market, Implied Volatility (IV) increases prior to results, causing option sellers to demand higher premiums. After results are announced, smart money typically exits, flooding the market with supply and causing stock prices to fall, even with good results. Retail traders often enter trades after results, missing potential gains and facing significant downside risks.
Agarwal suggests that options trading can provide an edge, as rising IV can cushion losses. He recommends aggressive buying before announcements and selling options after IV collapses. For directional trades, he advises using spreads to limit losses while remaining in the trade. Understanding trader positioning and premium behavior is crucial for success during earnings season.
