Building Better Stock & Option Income – Part 3 Why We Avoid Earnings

Dual Edge Research publishes two powerful newsletters that work great individually — and even better together. The Bull Strangle Newsletter focuses on stocks and options, combining stock ownership with premium-selling strategies to generate consistent income and market-beating returns. The Smart Spreads Newsletter specializes in seasonal commodity futures spreads, offering a diversified approach with low correlation to equities. Together, they deliver a complete investment perspective — one focused on income, the other on diversification — all under one simple subscription.

Introduction - When Higher Premium Doesn't Mean a Better Trade

In the previous article, we examined how approximately 5,000 optionable stocks are systematically narrowed to a watch list of just 15 to 25 candidates. One of the most important filters in that process removes stocks scheduled to report earnings during the four-week holding period. At first glance, that decision may seem counterintuitive

After all, earnings announcements typically produce higher implied volatility, which translates into larger option premiums. Many option-selling strategies intentionally seek out these opportunities, believing the additional premium more than compensates for the added uncertainty. The Bull Strangle methodology takes the opposite approach Rather than chasing larger premiums, it seeks to maximize the probability of consistent returns. Historical research suggests those two objectives are not always the same.

Higher Premiums Come with Higher Risk

Option prices reflect expected future volatility. Before an earnings announcement, that expectation increases dramatically because no one knows how the market will react. A company may report exceptional earnings yet decline because expectations were even higher.

Another company may miss estimates but rally because investors anticipated even worse results. Revenue, margins, guidance, analyst revisions, management commentary, and future expectations can all influence the stock's reaction.

Unlike normal market fluctuations, earnings introduce binary risk. A single overnight move can completely overwhelm weeks of option premium. For an income strategy built around consistency, that type of uncertainty becomes difficult to justify.

Let the Data Decide

Rather than relying on theory, I wanted to answer a simple question:

• How have stocks actually performed when they reported earnings during the holding period?

To find out, I analyzed every stock considered during the Bull Strangle screening process between the May 22 and July 17 expiration cycles. The results were striking.

While the S&P 500 gained 1.7% over the same period, stocks that did not report earnings performed broadly in line with the market. Stocks that did report earnings, however, underperformed dramatically. The average difference between the two groups was 3.2 percentage points. That is a meaningful gap for positions typically held only four weeks.

It's More Than Returns

Perhaps even more important than average performance is what happened to the risk profile. The percentage of stocks producing large losses increased from 18.3% to 28.6% when earnings occurred during the holding period. That's an increase of more than 50%.

Similarly, the percentage of winning trades declined from 50.6% to 40.9%. In other words, earnings stocks not only produced lower average returns—they also generated fewer winners while experiencing significantly more large declines. For a strategy built around collecting option premium, these are exactly the outcomes we seek to avoid.

Why This Matters for Option Sellers

Some investors may argue that the additional option premium compensates for the increased risk. Occasionally, that's true. But the objective of the Bull Strangle strategy is not to maximize premium on any individual trade. The objective is to maximize the consistency of an entire portfolio over hundreds of trades.

Large overnight price gaps cannot be managed. Technical trends become irrelevant. Support and resistance levels may fail instantly. Option premiums that appeared attractive only hours earlier can disappear in a single earnings announcement. The larger premium exists for a reason. The market understands that earnings create uncertainty and prices that uncertainty accordingly.

Improving Probabilities Through Elimination

One of the recurring themes throughout this series has been that successful investing often involves eliminating lower-probability opportunities rather than discovering hidden winners. The earnings filter is an excellent example. By simply removing stocks with scheduled earnings announcements, the remaining candidates have historically produced:

• Higher average returns
• Higher win rates
• Fewer large losses
• More consistent performance
  • Which option should we actually sell?

Importantly, this improvement does not require any market prediction. No forecasts. No earnings estimates. No opinions about management. The process recognizes that historical probabilities have been less favorable during earnings periods and adjusts accordingly.

One Filter Among Many

Avoiding earnings does not guarantee success. It is simply one component of a broader implementation framework. Liquidity screens improve execution. The stock ranking system identifies stronger candidates.

Sector diversification balances portfolio exposure. Objective strike selection manages risk. Position sizing controls capital allocation. Each step contributes incrementally to the overall process. Together, those small improvements combine to create a disciplined, repeatable methodology designed to improve consistency over time.

Other Articles in the Series

Part 1 - How the Process Works

Part 2 - From 5,000 Stocks to 20 Candidates

Looking Ahead

By now, we've identified a diversified watch list of high-quality stocks that have passed every screening filter. The next question becomes:

Many option traders immediately focus on Delta. While Delta certainly has value, it is far from the only consideration. In the next article, we'll examine why bid-ask spreads, open interest, trading volume, and option liquidity often have a greater impact on real-world performance than theoretical pricing models—and why successful execution begins long before a trade is placed.

Want to build a more complete trading toolkit?

The Bull Strangle Newsletter focuses on stocks and options, combining stock ownership with disciplined option-selling techniques designed to generate consistent income while managing risk.

The Smart Spreads Newsletter focuses on seasonal commodity spreads, a historically proven approach that seeks opportunities across agricultural, energy, metal, and financial futures markets.

Each strategy is designed to stand on its own, but together they provide a diversified approach that can perform across a wide range of market environments. For traders looking to deepen their education, The Bull Strangle Strategy and Trading Commodity Spreads are both available on Amazon.

Visit BullStrangle.com to subscribe for just $1 for the first month.

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Darren Carlat

Dual Edge Research

(214) 636-3133

DualEdgeResearch@gmail.com

www.BullStrangle.com

Disclaimer

This information is for informational purposes only and should not be considered as investment advice. Past performance is not indicative of future results, and all investments carry inherent risk. Consult with a financial advisor before making any investment decisions.