Long Calendars--High Front IV

B

Boy Plunger

I have been buying Calendars right before earnings depending on the outlook for the underlying and which options offer the best chance of profiting.

The Calendar spread is of little value to me per se other then to capture high front month IV. They are sold after the collapse--not held to expiry. Typically, the best opportunities have arisen from at least a 10% Vol difference. Dbl Calendars are usually redundant but come in handy for stocks like ISRG and MA.

This earnings season 76% of my Calendar trades made at least 50% on risk although there are only about a dozen Dbl/Calendar trades thus far. It is a nice little spread that comes in handy. Using this setup properly improves your overall risk/reward/prob.

I'm hopeful that other option traders can expand on this basic approach.

Floor traders say that the consistent trader will be the next to blow up.
 

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I hope my terminology is correct with this............Shorting the "calendar spread", i.e. short-selling the front-month strike price AND buying the same strike price in a deferred month is a much more limited-risk trade compared to naked short-selling of out-of-the-money options. Both methods benefit from time and volatility decay. If a stock gaps 20% away after an earnings announcement, you won't get hurt too badly with the calendar. The "naked" seller WILL. The consistency of one method is potentially less volatile than the other.
 
Quote from nazzdack:

I hope my terminology is correct with this............Shorting the "calendar spread", i.e. short-selling the front-month strike price AND buying the same strike price in a deferred month is a much more limited-risk trade compared to naked short-selling of out-of-the-money options. Both methods benefit from time and volatility decay. If a stock gaps 20% away after an earnings announcement, you won't get hurt too badly with the calendar. The "naked" seller WILL. The consistency of one method is potentially less volatile than the other.
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Buying a Calendar is selling a near month option and buying the same strike next or further month option.

The goal for these earnings Calendar setups are to capture high front month IV in a limited risk construct. We don't want an adverse underlying price movement beyond the difference in front/back IV relative to our strikes.

Although as you have pointed out we are afforded a range for the Calendar to profit in a limited risk/reward scenario with improved probability because we sold inflated IV's in the front month.
 
One of the Calendars that did not get filled was Diamond Offshore (DO).

IV's on the put side were juiced and i was going to sell the 85 Put Calendar the day before earnings were released.

Does anyone with a better understanding of Volatility structure and surface care to comment on the still inflated IV's for DO ?

Thanks
 
Quote from Cluseau:

One of the Calendars that did not get filled was Diamond Offshore (DO).

IV's on the put side were juiced and i was going to sell the 85 Put Calendar the day before earnings were released.

Does anyone with a better understanding of Volatility structure and surface care to comment on the still inflated IV's for DO ?

Thanks
More...

any one time ( special ) dividend coming soon ?
 
Quote from Cluseau:
One of the Calendars that did not get filled was Diamond Offshore (DO).

IV's on the put side were juiced and i was going to sell the 85 Put Calendar the day before earnings were released.

Does anyone with a better understanding of Volatility structure and surface care to comment on the still inflated IV's for DO ?
More...
DO is kicking off a $4.00 special dividend tomorrow morning. The puts are priced to reflect that. While they may appear to be juiced, they're not.
 
Quote from Cluseau:

I have been buying Calendars right before earnings depending on the outlook for the underlying and which options offer the best chance of profiting.

The Calendar spread is of little value to me per se other then to capture high front month IV. They are sold after the collapse--not held to expiry. Typically, the best opportunities have arisen from at least a 10% Vol difference. Dbl Calendars are usually redundant but come in handy for stocks like ISRG and MA.
More...
With skew issues, I often redundantly (g) ratio the OTM calendar on both sides. Usually 3:2 but sometimes 2:1. I avoid the 3 letter puppies because if needed, they're tough to support in the pre market or after hours.

For the issues that tend to move a lot post earnings, this quarter, have been tinkering with the opposite... just slightly more OTM longs than shorts. Nothing to brag about but really good results with some (like ISRG), not so hot with others.
 
Quote from spindr0:

With skew issues, I often redundantly (g) ratio the OTM calendar on both sides. Usually 3:2 but sometimes 2:1. I avoid the 3 letter puppies because if needed, they're tough to support in the pre market or after hours.

For the issues that tend to move a lot post earnings, this quarter, have been tinkering with the opposite... just slightly more OTM longs than shorts. Nothing to brag about but really good results with some (like ISRG), not so hot with others.
More...

This is exactly what i did for ISRG (115/90) except the ratio was 1:1. Looking ahead though it seems like a good approach to ratio one side higher for ISRG and MA types.

I was so busy analyzing good candidates that it didn't dawn on me-the special dividend! Thank You guys for pointing this out. (Rookie)

The IV's actually did get juiced a few days prior to earnings if you look at HIV. It was pretty decent too.

My goal is to start trading out each leg when there is little leg-risk. I'm holding a couple losers now too but just want the short legs to expire worthless this week and hedge the long legs into a backratio or possibly a vertical. Typically i like to sell the Calendar when it hits my stop of 1/2 the projected profit but in certain instances this would be counter-productive.

Thanks for the info fellas
 
>> This is exactly what i did for ISRG (115/90) except the ratio was 1:1. Looking ahead though it seems like a good approach to ratio one side higher for ISRG and MA types. <<

I'd say yes to that if you had a directional bias. If you didn't, ratio writing both sides gives you a little extra premium to withstand more of a move against you, in either direction. And there's no right or wrong. It's what you understand and feel comfortable with.

>> I was so busy analyzing good candidates that it didn't dawn on me-the special dividend! <<

LOL. Simple rule of thumb. If it looks too good to be true, it usually is (g).

>> The IV's actually did get juiced a few days prior to earnings if you look at HIV. It was pretty decent too. <<

If you're not familiar with it, the IVolatility site provides some tools for comparison:

http://www.ivolatility.com/options.j?ticker=DO:NYSE&R=1&period=12&chart=2&vct=

Good luck.
 
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