How to Trade Options Around Earnings

The Quantitative Edge: How Wall Street Strips Event Premium from Options and Predicts what IV will Crush to After Earnings and Key Data.

Over my 12-year career as an options market maker at DRW and other tier-one proprietary trading firms, one principle remained paramount: accurately decomposing event volatility from baseline volatility determined profitability.

After years of quantitative research, one truth persists – exogenous market shocks remain unpredictable. No amount of stochastic modeling or machine learning can forecast black swans. What sophisticated traderscan do is extract signal from noise, identify structural mispricings, and exploit the market's systematic tendency to misprice known catalysts.

The Retail Trader's Blindspot: Compound Event Premium

Most retail traders approach options with a fundamental misunderstanding. They calculate 20-day realized volatility, observe 22% annualized vol, then see ATM options trading at 25% implied volatility and assume the market is irrational. They're missing the entire event overlay.

Without decomposing these overlapping events, you're trading blind. That "expensive" 25% IV option might actually be underpriced once you strip out the event premium and reveal a 20% clean IV against your 22% baseline.

The Institutional Approach: Parkinson Volatility & Variance Decomposition

Professional market makers don't use simple close-to-close returns. We employ Parkinson's volatility estimator, which captures intraday ranges and eliminates overnight gaps, bid-ask bounce, and closing auction noise.

This provides our 90-day baseline volatility – the foundational Gaussian behavior of the asset stripped of all event noise.

Quantifying Event Impact: The Multiplier System

We calculate event multipliers using front-weighted serial correlation of historical moves. For earnings, we weight the most recent quarter at 50%, previous at 30%, and two quarters ago at 20%. This captures both recency bias and mean reversion.

The Mathematics of Event Stripping

Here's where institutional traders gain their edge. We convert event multipliers to variance space (square the volatility multiplier) because variance is additive across time, while volatility is not.

Compound Events: The Real Complexity

Professional term structures account for multiple overlapping events. A 45-day option might span earnings, two FOMC meetings, NFP releases, and CPI prints. Each adds variance independently:

Use This Professional Term Structure Analyzer - All Done For You

This tool below does all the analysis for you for any ticker. Institutional-grade event stripping for any US equity or index. See what the smart money sees. Know whether options are Cheap or Expensive based on the Clean Term Struture. Predict where IV will be post Event.

Your Quantitative Edge

This tool implements the exact methodology I used at DRW to identify structural mispricings. We've automated the entire workflow:

The Bottom Line

Event stripping isn't just another technical indicator – it's the foundational framework for professional volatility trading. Without it, you're essentially gambling on whether the market's event pricing is correct.

But here's the real kicker that most traders miss: by quantifying event premium, you're essentially predicting exactly where implied volatility will crash to post-event.When you strip out the event premium and reveal that clean IV of 20%, you're not just identifying a mispricing – you're seeing the exact level IV will collapse to after earnings. It's like having a crystal ball for post-event volatility crush.

Think about it: that 25% IV option heading into earnings? Once the event passes, the market will strip out that 3.5x multiplier automatically. Your clean IV calculation shows you it'll crash to 20% – that's a 20% drop in implied volatility you can predict with mathematical precision. This is why professional traders dominate earnings plays – they know exactly where volatility is headed before the event even occurs.

This tool gives you the same quantitative edge that institutional traders use daily. Whether you're selling premium into earnings, buying calendar spreads to capture the crush, or structuring volatility arbitrage plays, you now have the math to see the future of implied volatility. You're no longer guessing where IV will settle – you're calculating it.