What is a binary event?
In one line: A binary event is a single scheduled piece of news, such as earnings, a drug approval or a court ruling, that can move a stock sharply one way or the other.
How it works
A binary event is news that can push a stock a long way in either direction, all at once. "Binary" means two very different outcomes, a bit like a coin flip.
Common ones:
- Earnings reports, four times a year for most companies
- Drug approvals for drug and biotech companies
- Court rulings, mergers and votes that a company's future rides on
Before the news, option prices rise. Implied volatility climbs because the market expects a big move. That makes the premium look large. After the news, implied volatility usually drops fast. That's IV crush, and our IV crush guide explains it.
The problem for sellers is the gap. The stock doesn't drift past your strike. It opens past it.
An example (hypothetical)
XYZ trades at $50 and reports earnings tonight (an illustration, not a trade idea). The $45 put that pays $1.00 in a normal week now pays $2.50. You sell it and collect $250.
The report disappoints. XYZ opens the next morning at $32.
| XYZ after the news | What happens | Result |
|---|---|---|
| $55 | Put expires worthless | +$250 |
| $48 | Put loses value fast (IV crush) | +$250 at expiry |
| $42.50 | Assigned at $45 | $0 |
| $32 | Assigned at $45; shares worth $3,200 | −$1,050 |
Your cushion was $7.50, from $50 down to the $42.50 break-even. The stock opened $10.50 past it. There was no time to roll or close: the price was simply there when the market opened.
The extra $150 of premium was the market's price for this risk. One bad night took more than four times what the put paid. You now own 100 shares at $45 in a stock the market just marked down hard. A math example, not a promise.
Why it matters for sellers
In the wheel strategy, you want to get paid for time passing, not for calling a coin flip. A binary event turns a slow trade into a bet on one night.
Our rule is simple: we don't hold a short option through a binary event we know about. No premium makes that bet worth it for us. Before every trade, check the earnings date and any big scheduled news before expiry. If it lands inside the trade, pick an expiry that ends before it, or wait until after.
Questions
Is earnings always a binary event?
For most single stocks, it can be. Some quarters move a stock a little, some a lot. You don't know which one you'll get, so treat it as one.
Why not sell the high premium right before earnings?
Because it's high for a reason. The market expects a big move. If it comes in the wrong direction, the loss can be many times the premium.
Do ETFs have binary events?
Broad ETFs rarely do, because they hold many stocks. Big economic reports can still move them, but usually less than one company's news moves its stock.
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