Calendar Spread Earnings Play

Although many people thought we were crazy for getting bearish in tsla this pre earnings put debit spread trade made us 200 today.

Calendar spread earnings play. Normally calendars are long vol but on earnings the iv inflation on the front week can be 3 times bigger than the iv inflation on the further back weeks. If this ratio is bigger than the ratio of the vegas does this actually turn the forward calendar spread into a short vol play on earnings. In sharp contrast straddle returns are significantly positive around earnings announcements.

A calendar spread is a strategy involving buying longer term options and selling equal number of shorter term options of the same underlying stock or index with the same strike price. Long calendar spreads allow traders to hedge for volatility risk especially to navigate earnings season or other corporate news events. The reverse calendar spread a standard calendar spread involves buying a call or put option at a given strike price in a farther out expiration month and selling a call or put option at the same strike price in a closer expiration month.

Calendar and diagonal spreads essentially work the same with the important point being the strike price of the short option that you have sold. Ask most option traders and they ll say that if the markets are trending distinctively in a given direction long calls and puts might provide desirable returns relative to risk. In this scenario the premium from that short option bleeds off and funnels straight into the trader s wallet.

Average at the money straddle returns from one day before earnings announcement to the earnings announcement date yields a highly significant 2 3 return when focusing on taking a position for earnings we want to get long our straddle at the money. The maximum gain for your spread will come if the stock price ends up exactly at that strike price when the option expires. One of the most useful characteristics of options is their ability to control risk and achieve a high probability of success when trading impending earnings announcements.

Calendar spreads perform optimally when the underlying hovers close to or right on the strike of the near month short option. After the huge run up from 140 to 260 and getting some technical sell signals we were pretty sure this stock would pull back. Using a triple calendar spread to trade google earnings trading earnings reports with option calendar spreads.