Diagonal call ratios to take advantage of Pre-earnings IV

J

JJacksET4

I was looking at some of the earnings coming out today and tomorrow and was surprised at just how high the Sept IVs are in relation to the Octs and I was trying to put together some positions to take advantage of the skew knowing a few things:

1. I don't know what the stock will do price movement wise after earnings.
2. I know the Sept IVs will plunge and by Sept expiration at least there will be no time value (of course there may very well be intrinsic value).
3. I know the Oct IVs will likely drop off quite a bit as well.

I saw ADBE and did this trade on paper before market close:
-10 31 Strike Sept Calls - $231 each - IV ~119
+20 35 Strike Oct Calls - $61 each - IV ~ 35
Credit = $1090

If ADBE were to fall below $31, you could keep the credits. Otherwise, you hope the extra qty of calls for Oct and the fact they still have about a month to go allows you to close out for a reasonable price. If ADBE moves up enough of course, there could be good gains. ADBE in AH isn't changed much so we'll see what happens, but probably not real good so far.

I also found BBBY even though I must admit I didn't know they were reporting until after hours. I did the following as a similar paper trade:
-10 67.5 Strike Sept Calls - $310 each - IV ~ 119
+20 75.0 Strike Oct Calls - $89 each - IV ~ 36
Credit = $1320.
In the case of BBBY, it is about $65ish AH, so there appears to be a decent chance the 67.5s will be nearly worthless tomorrow and the trader could keep the credits and the extra calls or of course sell the calls for what they can get.

I also looked at ORCL which has earnings tomorrow AH and did this as a paper trade:

-5 31.5 Strike Sept Calls - $147 each - IV ~ 70
+10 34 Strike Oct - $40 each - IV ~ 22.5
This is a $335 credit with $1250 requirements.

So, I am going to watch these and was just looking for any insight people had about similar trades, or other large IV skew pre-earnings option trades you guys might like to do.

JJacksET4
 
Well,

ADBE was pretty bad.

Closing price was like $355 for the shorts and $76 for the longs. That resulted in a $940 loss.

The BBBY trade would have been much better as the BBBY 67.5 calls are basically worthless. The 75 Octs are as well. So the trader would have been able to keep the upfront credits.

We'll see how ORCL does soon.

JJacksET4
 
I wonder how greeks looked for these positions. Your primary objective of trade was to be short Vega but buying more back month neutralizes it or creates long vega as opposed to your initial trade objective. On a weight age basis you might be still short vega though.

Biggest risk to me on a calendar is gamma risk- buying more back month can mitigate position gamma risk. I am not sure how greeks will change once vol comes and if underlying moves.

How do greeks for such positions look with underlying movement
 
Say the sold short options for ADBE was trading at 355 and the long options at 76 that means 355*10/76 = 46 options to neutralize gamma.
 
Unfortunately, in the end it is mostly a directional bet....


Quote from marameo:

This strategy sounds good although I am wondering..why not do it for a small debit instead of a huge credit?
More...
:eek:
 
Quote from JJacksET4:
I saw ADBE and did this trade on paper before market close:
-10 31 Strike Sept Calls - $231 each - IV ~119
+20 35 Strike Oct Calls - $61 each - IV ~ 35
Credit = $1090

If ADBE were to fall below $31, you could keep the credits. Otherwise, you hope the extra qty of calls for Oct and the fact they still have about a month to go allows you to close out for a reasonable price. If ADBE moves up enough of course, there could be good gains.
More...

What led you to think so?

(for the sake of simplicity I will assume multiplier is 1)

By selling short those ten C31SEP for $231 each, you get a credit of $2310 which will pay for thirtyseven C35OCT long options, no actual cash outlay for this position. You should compare deltas!

So, your strategy now looks like the following:

-10 31 Strike Sept Calls - $231 each - IV ~119
+37 35 Strike Oct Calls - $61 each - IV ~ 35

If ADBE were to stay or fall below $31, you lost nothing (besides fees/commissions). What if the market rises? By giving up the opportunity to make money if the market stays or fall, you are gaining the opportunity to make some, if the market rises.

Now let's get this a step further:


-10 31 Strike Sept Calls - $231 each - IV ~119
+50 35 Strike Oct Calls - $61 each - IV ~ 35


$740 actual cash outlay, so a small debit. Suppose the 31 Strike Sept Calls expires worthless, in order to break even, your 35 Strike Oct Calls should be pricing 14,8 each, at least ($740/50 long options). What if the market rises? I'll leave it up to you...

Againg, compare deltas!
 
You must log in or register to reply here.
Back
Top