Trading Earnings Volatility with Options · Erik Smolinski

Market Performance & Outlook (2024–2025)

• Eric Smolenski's 2024 performance was his second-best year ever; 2025 is currently on pace for a solid, consistent year.
• 2023 performance was 118%, exceeding his previously cited 64% figure.
• Smolenski's Compound Annual Growth Rate (CAGR) from 2007 to 2023 was 22% compared to the S&P 500's 8.5%.
• Recent years (late 2023–2024) are viewed as statistical outliers that have temporarily inflated his CAGR to the low 30s; normalized expectations return to 22–24%.
• Smolenski prioritizes consistency over top-line performance to ensure long-term survival and risk management.
• Current market volatility (VIX above 20, historic average 14–16) is viewed as highly favorable for options traders, regardless of strategy direction.
• Political unpredictability, specifically regarding tariff announcements, creates volatility that levels the playing field against institutional advantages.
• The market regime has shifted since 2007, requiring adaptations such as moving away from small-cap dominance in favor of other sectors.
• The introduction of daily SPX expirations on May 16, 2022, was integrated as a significant addition to Smolenski's trading toolbox.

Options Trading Philosophy & Psychology

• Trading difficulty diminishes once a trader shifts focus from individual trade outcomes to the statistical performance of their process.
• Smolenski advocates for "simplicity," avoiding complex multi-leg structures (e.g., "32-legged iron dragons") in favor of observable market effects.
• Successful options traders must be process-driven, naturally curious, and capable of suppressing ego-driven reactions to market anomalies.
• Patience and the ability to persist despite initial failure are critical; impatience is identified as a primary cause of failure.
• Outcome-based thinking is detrimental; traders should view options performance over tens of thousands of trades rather than single event results.
• Smolenski rejects the "fast money" narrative, noting that turning small accounts ($2,000) into millions is statistically improbable.
• "Indifference" to trade outcomes is necessary; a trade that works due to external factors (e.g., unexpected tariffs) provides no replicable data for the intended strategy.
• Smolenski emphasizes that if a trade thesis (e.g., volatility expansion) fails to materialize, the position should be closed immediately rather than adjusted or "revived" to save it.
• He recommends paper trading or Excel-based "what-if" scenario modeling to gather data, though he notes that paper trading is often disliked by practitioners.

Specific Strategies & Earnings Plays

• Pre-Earnings Vol Expansion: Trading 2 weeks prior to earnings to capitalize on implied volatility (IV) ramping up, typically using calendar spreads or long straddles/strangles.
• Earnings Contraction: Selling short strangles/straddles immediately after the close to play the drop in IV post-earnings, managed via strict position sizing (max 1% portfolio loss on worst-case historical moves).
• Post-Earnings Announcement Drift (PEAD): Trading directional breakouts (upside or downside) following the release, potentially holding the position into the following quarter.
• Sizing Methodology: Smolenski sizes positions based on the maximum historical move (12-month lookback) to ensure a potential loss does not exceed 1% of the total portfolio.
• Risk Mitigation: Tech stocks often receive asymmetric protection (wings added to the upside) due to the higher probability of massive upside gaps compared to downside drops.
• Zero DTE (Days to Expiration): Smolenski trades SPX and NQ zero DTE vertical spreads, utilizing them for their gamma exposure but acknowledging the high risk of deviation from statistical norms.
• Basket Trading: Recommends trading earnings as a basket to reduce path dependency and idiosyncratic risk, leveraging the Law of Large Numbers.

Technical Analysis & The Greeks

• Smolenski differentiates between first-order Greeks (Delta, Vega, Theta, Rho) and second-order Greeks (Gamma), noting Gamma measures the rate of change of Delta.
• "Gamma Exposure" (GEX) is identified as a secondary market effect for measuring dealer positioning and potential hedging activity.
• Theta decay management is achieved by selecting options that are deep in-the-money, deep out-of-the-money, or have longer durations.
• Stops on options are generally deemed suboptimal; instead, traders should set alerts based on the underlying profit mechanism (e.g., IV changes) rather than price P&L.
• Understanding that underlying price movement does not guarantee option profit is a core concept; losses occur when Vega or Theta moves outweigh Delta gains.

Futures & AI Integration

• Smolenski utilizes futures primarily for after-hours trading and hedging options positions (e.g., shorting Nasdaq futures to hedge a long NVDA earnings trade).
• He views options on futures as less liquid and generally prefers trading index futures outright.
• Regarding proprietary trading firms, Smolenski declines to use them to preserve self-direction and information privacy, though he acknowledges they provide a useful "forcing function" for discipline.
• Smolenski is currently obsessed with refining Zero DTE models and integrating AI into his data analysis workflow.
• He uses AI for statistical analysis of strategy performance, factor identification, and sizing filters, rather than for trade execution automation.
• Smolenski resists automating trade execution, preferring manual intervention to account for non-statistical market anomalies.
• He is developing a proprietary backtesting and trade log analysis tool with a peer, though the project is currently suffering from significant "scope creep."

Key Disagreements & Corrections

• Smolenski corrected the host's assumption that a trade profiting from an unexpected tariff event validated the earnings strategy; he labeled it "no news" regarding the strategy's validity.
• He advised against the common trader habit of "fixing" losing positions by rolling them or adding legs, emphasizing that admitting a thesis is wrong is superior to hoping a modification works.
• Smolenski noted that while retail traders often fear unlimited risk in short premium strategies, proper sizing eliminates the actual threat to the portfolio.