It pays to keep track of earnings and dividends dates for your underlying stock. For example, if you've sold calls and there's a dividend approaching, it increases the probability you may be assigned early. This is especially true if the dividend is expected to be large. That's because option owners have no rights to a dividend. In order to collect it, the option trader has to exercise the option and buy the underlying stock.
As you'll see in Mistake #8, early assignment is a random, hard-to-control threat for all options traders. Impending dividends are one of the few factors you can identify and avoid to reduce your chances of being assigned.
Earnings season usually makes options contracts pricier, for both puts and calls. Again, think of it in real-world terms. Options can work like protection contracts; they can be used to hedge the risk on other positions. For example, if you live in Florida, when will it be most expensive to buy homeowner's insurance? Definitely when the weatherman predicts a hurricane is coming your way.
The same principle is at work with options trading during earnings season. Pending news can produce volatility in a stock's price — like a brewing hurricane headed straight for your house. If you want to trade specifically during earnings season, that's fine. Just go in with an awareness of the added volatility and likely increased options premiums. If you'd rather steer clear, it might be wiser to trade options after the effects of an earnings announcement have already been absorbed into the market.
How can you trade more informed?
Steer clear of selling options contracts with pending dividends, unless you're willing to accept a higher risk of assignment. You must know the ex-dividend date. Trading during earnings season means you'll encounter higher volatility with the underlying stock — and usually pay an inflated price for the option. If you're planning to buy an option during earnings season, one alternative is to buy one option and sell another, creating a spread (see Mistake 2 for more information on spreads).
If you're buying an option that's inflated in price, at least the option you're selling is likely to be inflated as well.