When I give these earnings rundowns, I generally analyze the success and failure of the options "prediction" relative to the gap at the subsequent open. I don't factor in the trading range after hours, or at least don't often write it up that way. Sometimes, it makes no difference. The stock might move on such light volume before finding a level that it essentially gapped. It also might just move in one direction. In fact, that's often what happens, and the gap analysis gives the best picture of the earnings reaction.

But "often" does not mean "always." Sometimes the gap wildly understates the reaction.

Take Amazon.com, Inc. (NASDAQ:AMZN - 272.76) from Tuesday. It closed at $260. Then on Wednesday it opened at $283. The options went out expecting about a $23 move, so the reaction was almost perfectly in line.

That truly only tells the story if you left at exactly 4:00 p.m. and didn't return until 9:30 a.m. the next morning.

Here's the after-hours trade (click the chart to enlarge):

The headline number looked bad, and AMZN instantly dropped $10 -- and on the highest volume of the after-hours session, to boot. The subsequent counter-reaction was quick and painful for anyone that sold the first dip, as the stock ticked at $269 within two minutes. Within seven minutes, AMZN was trading as high as $279. By 4:28 p.m., it was trading around $290. So all told, it had a $40 range low to high, and a $50 round trip if you add in the first $10 drop.

The options expectation I write up is intended to give a general sense of how someone with a delta-neutral, long or short volatility position (say straddles or strangles) would fare on the earnings. So if it goes out at $23, as it did in AMZN, it suggests that option longs and option shorts more or less broke even. But results may certainly vary. A trader with a long volatility curve who traded in the after-hours session certainly had the shot to more than pay for his position. The same trader who sat and waited probably had a bit of a wash the next day.

Conversely, a short volatility trader (say a strangle and/or straddle seller), would have done better sitting on the sidelines and letting the stock settle down. The aggressive short gamma trader might have gotten a serious case of whipsaw.

The takeaway isn't that long gamma traders should stay aggressive, and short gamma traders passive -- just that there's a bevy of moving parts in all these, and the "Options Move" is just a guideline. Look no further than Apple Inc. (NASDAQ:AAPL - 456.83) to see the reverse lesson. Short gamma traders could have sold stock in the $500 or $490 range, down off the close but way higher than the $460 level of one hour later.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.