Earnings Dual Calendar Spread

Earnings Dual Calendar

The dual calendar spread consists of a put calendar spread and a call calendar spread. It can be put on for a net credit or a net debit. A debit dual calendar spread can be an effective strategy around earnings time. We’ll call it an earnings dual calendar and here’s how it works. We want to be long the options that are in the reporting month because we are forecasting a rise in implied volatility in the option price until the report comes out, and then the implied volatility will fall rapidly. We’ll be short the contracts that will expire before the earnings release because we know that their implied volatility will drop with their expiration date. He’s an actual example from the time of this writing. This is not a trade recommendation. STI, Sun Trust Bank will report earnings on Monday October 22nd, 2012. We anticipate that the implied volatility of the November options will remain elevated until the earnings announcement. We forecast that the implied volatility of the October options that expire on October 20th, before the earnings announcement will collapse by the expiration date. We can put this trade on in the first week of October and plan to hold it until the October expiration on October 20th. Here are some of the key data points;

Size        Exp                Strike           Put/Call         Price      IV                   Theta              Delta

+1          Nov 17           28                 Put                   0.93       31.27%         -1.34              -39.72

+1           Nov 17           29                Call                  1.00        29.45%         -1.32               47.22

-1            Oct 20             28                Put                 -0.39      27.75%          +1.85               34.31

-1            Oct 20              29               Call                 -0.46      25.52%           +1.85              -41.91

So, the net debit is $108 which is also the maximum risk. For a ten contract position that would be $1080. The theta is $1.01 which means that for each contract you’ll earn the decay of $1.01 per day, for a ten contract position that amounts to just over $10 per day in option decay. The net delta is -0.10 which is essentially delta neutral. The plan is to close the position on the day of the first expiration before the earnings come out for a net debit greater than $1.08. If the underlying makes a substantial price movement the position will take on some delta and some form of a gamma scalping strategy can be applied to make the position delta neutral again.

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About sellacalloption

Author, Radio Show Host and Portfolio manager and chief option strategist for IWC Asset Management.

Posted on October 4, 2012, in Neutral Income Strategies, Option Basics and tagged , , . Bookmark the permalink. Leave a comment.

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