Yesterday in the Blog I talked about a Live GOOG Pre-Earnings Calendar I did. Today I took off the trade for about a 7% profit in 1 Day. I bought 1 April 28 Expiration 835 Call and Sold 1 April 21 Expiration 835 Call for $10.80 Debit and sold it out today for a Credit of $11.54 . The price of GOOG was 834 yesterday when I bought the Calendar and the price of GOOG today was 835 when I took off the Calendar for a profit. I made $74 for every 1 Calendar, that would be a yield of 6.8% ( $74 divided by $1080).Why did the Calendar do so well in 1 Day? The implied Volatility of the long option went up more than the short option did.
What would be an explanation of why that happened? Referring to yesterday’s Blog, we originally bought an expiration that will be affected by Earnings and sold an expiration that would be expiring before earnings comes out. Therefore as each day passes, our long options may increase in Volatility while our short options may do nothing.
With RUT trading around 1360 and volatility up a bit, a trade that looks interesting is an asymmetrical iron butterfly entered below the current trading price as follows:
RUT at 1358
Sell one May 19 exp 1330 call
Buy one MAY 19 exp 1350 call
Sell one MAY 19 exp 1330 put
Buy one MAY 19 exp 1280 put
This trade gives an upside that is profitable no matter how high RUT trades and put side with the risk well below where RUT is currently trading. Take the trade off at 10% gain or loss.
Buy 1 GOOG April 28 835 Call and Sell 1 GOOG April 21 835 Call for $10.80 Debit with price at $834.43.
I just executed this order live at 1:17 pm central Chicago Time today, Monday. Why did I do this? Why would I pay 26 implied volatility for my long call and sell my short call at an 12 implied volatility? Because Earnings is coming next week and that will keep the April 28 Expiration Options high while the April 28 Options expiring this Friday will not be affected by next weeks earnings and the Implied Volatility should stay low or go down. How does this benefit me? For this Calendar Trade, I will have very little concern that I will lose money from Volatility decreasing and thus hurting the trade. Will I still have Price Risk? Absolutely. I paid $10.80 Debit or $1080 for this spread for every 1 contract. My goal would be to make 8-10 percent profit on my investment of $1080. So, I will have an order in immediately to sell out this Calendar for around $11.65 Credit for the rest of this week. That would be about an 8% profit on Capital used for this trade. If this spread trades around $9.60 or lower, I would get out and take my loss, around 10% on the Calendar cost of $1080. Obviously, if the spread is trading lower than the initial debit of 10.80 but hasn’t got to 9.60 yet, I could adjust or try to fix this trade by re-positioning the Calendar. This involves taking off the 1080 Calendar completely and entering a new Calendar at the strike closet to the current price of GOOG when you are making this adjustment.
Conclusion: This trade is a Calendar trade that tries to eliminate one of the two main foes of this strategy, Volatility, by buying an expiration affected by earnings and selling an expiration that expires before earnings. This strategy still has Price Risk, so we need to have a plan and exit the trade if the Debit of the Calendar decreases too much as the price of GOOG moves too far above the strike of 1040 or too far below the strike of 1040.