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The premium looked great. Then I saw earnings were coming

The premium was high because the market expected a big move on the earnings report. That's a warning, not a gift. If the stock gaps through your strike, the premium covers only a slice of the loss. Here's the math, your choices, and the check that prevents it.

Options guide · 9-minute read · Updated 2026-10-27

What's happening in your account right now

You sold a put that paid much more than usual. Maybe you noticed the earnings date after you sold. Maybe you saw it and thought the premium made up for it. Either way, the report is either coming in a day or two, or it just came out and the stock gapped.

If the report hasn't come out yet, you still have choices. If it has, and the stock dropped through your strike, you're looking at an assignment. Both cases are below.

You're not alone in this. The biggest premiums on a screen often sit on stocks with earnings that week. That's not a coincidence.

Why the premium was so high

Before a report, nobody knows if the numbers will be good or bad. The options market expects a jump either way, so Implied volatility climbs. Every option gets pricier, especially the ones that expire just after the report.

That extra price is the market's estimate of the gap. If the Expected move is about $7 on a $50 stock, a put $5 below the price is inside the range the market thinks is fairly likely.

Right after the report, IV usually collapses. That's called IV crush, and it's why selling before earnings is tempting: if the stock barely moves, the put loses value fast. See IV crush explained. But the crush only helps if the gap doesn't reach your strike.

The gap, worked out (an illustration, not a trade idea)

A made-up stock, XYZ, trades at $50. It reports earnings on Tuesday after the close. You sell a $45 put expiring that Friday for $2.00 ($200). The same strike the week after earnings would pay about $0.60.

You set aside $4,500. On Wednesday morning, XYZ opens at $36 after a weak report. On Friday you're assigned 100 shares at $45.

The premium was more than three times the normal amount. It still covered less than a quarter of the gap in the $36 row.

You now own 100 shares worth $3,600, bought for $4,500. Your cost after the premium is $43 a share.

And the covered-call half? After the report, IV crushes. With XYZ at $36, a call at $43 pays very little, and less than it would have before the report. The wheel slows right when you need it.

If the report hasn't come out yet

You have three real choices:

1. Close the put now. If the stock hasn't moved, the put may cost about what you sold it for, say $2.10. You'd lose about −$10 plus fees, and the risk is gone. Use a limit order; spreads widen before reports.
2. Hold and accept the gap risk. Only if you'd truly be fine owning the stock after a drop like the $36 row. Picture that row, not the $48 one.
3. Roll to a later expiry. This doesn't remove the report. It still lands inside the trade. A roll only helps if you also lower the strike a lot.

If you'd be upset by the $36 row, option 1 is usually the honest one. A small loss to step aside is cheap compared with the gap.

If the gap already happened

You own the shares at $45, with a cost of $43. The stock is at $36. Your choices:

• Hold and sell covered calls at or above $43, when they pay something. Slow, and it only works if the business is still one you'd own.
• Hold with no call, waiting for the stock to steady first.
• Sell the shares, take the −$700, and move the cash to a stock you'd rather own.

Avoid selling a call far below $43 just to collect something. That's how a paper loss turns into a locked one. See called away below my cost basis.

Whatever you choose, read the report itself. If the numbers show the business has changed, that's a reason to exit, not to wait. If it was a one-quarter stumble at a business you'd own, holding is more reasonable.

The rule for next time

Make this the first check on every trade, before you look at the premium:

1. Find the next earnings date. Your broker's quote page or the company's investor site will show it. See checking the earnings date before selling.
2. If it falls inside your expiry, stop. Either pick an expiry that ends before the report, or skip the stock until after it.
3. If you choose to hold through a report on purpose, size the trade so a gap of twice the expected move would still be bearable.

And treat any unusually high premium as a question: "what does the market know is coming?" Earnings is often the answer. Drug results, court rulings and product launches are others. High IV vs low IV stocks covers the bigger picture.

In the wheel strategy, skipping one earnings week costs a little premium. A gap through your strike can cost months of it.

In Canada, the same rules apply in a TFSA or RRSP. Covered calls are widely allowed; cash-secured puts depend on the broker, and options permissions differ by broker.

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