Now Reading
Crushing Once Again
100

Crushing Once Again

by MoleMay 18, 2016

Earnings season may be wrapping up, but that doesn’t mean the juicy options spreads have gone away.  In fact, we’ve uncovered two delightfully tasty earnings strategies for this week.  We’re going strictly Double Calendar this week (DC-style?) as we continue to refine our strategy to a finally honed profit-making machine.

Symbol: WMT
Strategy: Double Calendar
Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/19 earnings announcement.
When To Exit: After earnings announcement OR we hold through expiration if there is little IV movement.

Strategy Details:

Trades to open position           Price    Total
buy 10th June $60 Put             $0.75  -$75.00
sell 20th May $60 Put              $0.33    $40.00
sell 20th May $66.50 Call        $0.34  $32.00
buy 10th June $66.50 Call       $0.19   -$57.00
Total    $60 debit

 

Initial outlay: $60 (net debit)
Maximum risk: $63 at a price of $47 at expiry
Maximum return: $130 at a price of $60 at expiry
Break/evens at expiry: $69.65, $56.70

Volatility chart

Considerations: There are a couple differences on this double calendar. First off, the wing span is slightly unbalanced because the stock price is between two strike prices and the put skew is a bit more extreme than the call skew.  It makes a much more balanced spread for us to $6.50 wide between the short strikes instead of $7.00.  More importantly, this DC gives a nice, wide profit range, so we can take some liberties with our spread design.  Also, we wanted to go a full month out on the back months, but the strikes don’t match up (i.e. the back month only has strikes in increments of 2.5), so we stuck with 3 weeks.  WMT IV isn’t too much higher than the HV, so we should see the back months hold up a bit better.  Which reminds me, yes the IV isn’t that much higher than HV, but there’s still enough juice in the options to make it well worthwhile.

Symbol: DE
Strategy: Double Calendar
Idea: Sell inflated pre-earnings IV.
When To Enter: Before 5/20 earnings announcement.
When To Exit: After earnings announcement OR we hold through expiration if there is little IV movement.

Strategy Details:

Trades to open position           Price    Total
buy 10th June $78.50 Put       $1.06 -$106.00
sell 20th May $78.50 Put        $0.40   $40.00
sell 20th May $86.50 Call       $0.44  $44.00
buy 10th June $86.50 Call       $0.96   -$96.00
Total    $118 debit

Initial outlay: $118 (net debit)
Maximum risk: $122 at a price of $59.50 at expiry
Maximum return: $145 at a price of $86.50 at expiry
Break/evens at expiry: $89.85, $75.55

Volatility chart

Considerations: This DE double calendar is a bit more expensive because we went a little wider than the straddle suggests.  However, our profit range is now about $15 wide and we have solid upside potential.  Furthermore, in the event of a lackluster earnings move, we should still do fairly well.  Once again, IV isn’t too inflated in this case so back month crush shouldn’t be as much of a concern.  Here too, going out 4 weeks was the original goal but the strikes didn’t match up.  We’re inclined to stick with a 3-week gap as long as IV isn’t too jacked up.  Earnings are Friday mornings, so you have bit more time on this one.

 


About The Author
Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.