Why earnings create opportunities

Earnings reports often cause bigger price swings because investors react to the new information. Traders use options to position for these moves, which pushes up option premiums in the days before the announcement. After results, option prices usually fall quickly as uncertainty disappears – a phenomenon known as an “implied volatility crush.”

For long-term shareholders, this temporary increase in option premiums can be an opportunity to collect extra income by selling an option on shares they already own.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

What is happening in this example

A call option gives its buyer the right, but not the obligation, to buy shares at a fixed price (the strike price) by a specific date. Selling a call option on shares you own is known as a covered call. By selling the call, you receive the premium up front. In return, you agree to sell your shares at the strike price if the buyer exercises the option.

Suppose you own 100 Amazon shares, currently trading around USD 234. You could sell the 8 August 2025 call with a 245 strike (10 days to expiry) for about USD 2.65 per share. This would give you roughly USD 265 in income – about 1.1% of the share price for just over a week.

Possible outcomes at expiry

• Share price stays below USD 245: you keep your shares and the USD 265 premium.
• Share price rises above USD 245: your shares may be sold at USD 245. Including the premium, your maximum gain would be about USD 1,352 compared with doing nothing.
• Share price falls: the premium provides a small cushion, lowering your breakeven to about USD 231.35.

For investors who do not own Amazon

Investors who are not yet shareholders sometimes explore strategies that could provide income while potentially leading to a future share purchase at a lower effective price. One example is using an options strategy where cash is set aside in case the shares are bought later, but the exact strikes and expiries depend on individual preferences and market conditions. This strategy is called "selling a cash secured put". Readers should familiarise themselves with how a cash‑secured put works and seek further education before considering whether it is appropriate for them.

Points to remember

• A strong positive earnings surprise could push the share price well above USD 245, in which case you would miss out on additional upside beyond the strike price.
• A disappointing earnings report could cause a sharp price drop, and the premium would only offset part of that loss.
• Options are more complex than buying or selling shares. Always make sure you understand how they work and what could happen in each scenario.

In summary

Selling a call option on shares you already own can be a conservative way to collect extra income. Ahead of earnings, option premiums are often higher, making it an attractive time to consider this approach – but only if you are comfortable with the possibility of having to sell your shares at the strike price.