Earnings announcements may create a problem for traders as there may be an overreaction to the announcement. This overreaction takes the form of an unusual amount of buying or selling pressure.

Don't think you can guess which direction the stock will gap. Good earnings do not always equate to the stock moving higher and bad earnings do not always equate to the stock moving lower. This means that if you want to trade a stock over earnings you must be in a hedged play which means you are covered if the stock goes up or if the stock goes down.

One hedge play is a strangle. In a strangle you buy an out of the money call and an out of the money put. You must do this when the options are cheap so the best time is near expiration. Always buy front (or current) month options on this trade. And you only want to do this on volatile stocks that may gap big when the earnings are announced. When the markets open after the announcement you want to sell both options to profit from the overnight gap. It is very likely that one option will be worthless, ie: the stock gaps up, you sell your calls at a profit and your puts are worthless. Hold onto those puts as sometime between now and options expiration the stock may fill the gap. Since you will have one side of this trade that goes against you it is critical that you do this strategy only on stocks that are more volatile and are likely to have significant moves.

Generally you want to exit this trade in the first couple minutes of the market; however, having a thorough understanding of technical analysis may enable you to pull out even more profit by analyzing the intra-day chart.

The strangle has the potential to help you make money over an earnings announcement when it is difficult to know which way the stock will move. Stick to some simple rules to maximize your profits. Use this strategy only on the most volatile stocks and keep the cost of the trade to a minimum by buying a very small amount of time. Then sell the profitable option at the open or use intra-day charts to remain in the trade as long as it is going in your direction.