Tuesday, 1 April 2025

3 Earnings Trading Myths That Are Costing You Money

Don Kaufman here.

The market is throwing punches left and right—tariffs, weak economic data, and rollercoaster volatility—and everyone's scrambling to make sense of what's next. Welcome to 2025. But let's not waste time predicting the next headline, because here's what matters: earnings season kicks off in less than two weeks, and if you're not prepared, you're walking into the lion's den unarmed.

Earnings are one of the most exciting—and misunderstood—times to trade. But here's the problem: too many traders are falling for outdated myths that end up costing them money.

So today, we're going to tackle three of the most persistent earnings trading myths.

Spoiler alert: if you've been selling high implied volatility thinking it's your ticket to easy profits, or if you think earnings are an unpredictable black box, you're in for a wake-up call.

Let's get to it.

Myth #1: High IV Means High Risk

Reality: IV is just math. Chill out.

Let's talk about implied volatility (IV). You've heard it before: "IV is sky-high, so the risk must be through the roof!" Nah, that's total BS.

Here's the deal: high IV during earnings isn't a sign of increased risk—it's a mathematical adjustment to account for Theta (time decay). That's it. It's not some ominous signal that the stock is about to implode or explode.

Think of it this way: as we creep closer to an earnings announcement, options should decay in value because time is ticking away. But instead of the price dropping, IV rises to offset that decay. That's why the price of the option stays pretty stable.

So, what does that mean for you, the trader? It means you shouldn't be terrified by high IV. It's not a sign of impending doom—it's just the market adjusting for time decay. The real question isn't, "Is IV high?" It's, "What's the expected move?" Spoiler alert: the expected move is your north star, not IV.

Unlocking the Power of Implied Volatility in Stock Market Success

Myth #2: Selling Premium Is Always Profitable

Reality: The market is efficient, and your edge is probably zero.

Ah, the classic: "Sell high IV before earnings and watch the money roll in!" Look, I get it. Selling premium sounds sexy. But here's the ugly truth: the market is smarter than you.

Earnings trading is one of the most efficient areas of the market.

Why?

Because everyone and their dog is trading it. Hedge funds, market makers, quants—they're all pricing these options to perfection. The expected move (yes, that again) is baked into every option contract.

So, when you sell premium before earnings, you're not some genius capitalizing on inefficiency. You're just playing the market on its own terms. And guess what? The market usually wins.

Here's an example: let's say you sell an iron condor outside the $29 expected move on Lululemon. The stock moves... exactly $29. What happens? You break even—or worse, lose money after fees. Congratulations, you just spent hours managing a trade for zero upside.

The takeaway? Selling premium around earnings isn't a guaranteed win. It's like playing poker with pros—don't expect to walk away with their chips.

Myth #3: Earnings Are Unpredictable

Reality: The expected move is shockingly accurate.

I hear this one all the time: "Earnings are a total crapshoot. You can't predict what's going to happen!" Wrong. The expected move is your crystal ball.

Here's the thing: the market isn't just pulling numbers out of thin air. The expected move is a calculated prediction of how far the stock is likely to move after earnings. And guess what? It's surprisingly accurate.

Take Lululemon as an example. The market says the expected move is $29. That means traders expect the stock to land somewhere between $29 higher or lower than its current price. Could it move more? Sure. Could it move less?

Of course. But over time, the expected move is a reliable guide.

And this is where the magic happens. Instead of trying to guess whether a stock will beat earnings or miss, focus on the range of movement. Trades like butterflies or directional spreads let you target the expected move without needing to predict the future.

So, instead of fearing earnings, embrace the math. The expected move is your friend. Trust it.

Don Kaufman Explains Expected Move

Last Word

Look, the market is already hard enough without these myths clouding your judgment. If you're trading based on bad information, you're just handing money to the pros on a silver platter.

High IV doesn't mean high risk. It's just math.
Selling premium isn't a cheat code. The market's efficiency will humble you.
Earnings aren't unpredictable. The expected move is your guide.

So, the next time someone tells you to sell high IV or claims earnings are a total mystery, you'll know better. Focus on the expected move, manage your risk, and stop chasing myths that don't pay.

Now, get out there, trade smart, and let's crush it.

To your success,

Don Kaufman

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