Calendar Strangle

This is an illustration of a Calendar strangle trade made in Feb 2008 2 days before earnings and closed immediately after earning was released.

Even though the price went against the direction of the trade, it ended making money.

Calendar

o LC and LP at different months
o Reduce cost in trade
o Hedged directional for the short term ( protection if wrong direction )
o Place 14 –20 days before earnings or important event
o VIX should be reasonably low
o Choose stocks that move violently with earnings ( RIMM, FSLR,etc )

If bullish:

- Buy short term call
- Buy Long term Put

If bearish:

- Buy Long term call
- Buy short term put


Feb 11th 2008

o Trend was going bearish. So structured trade aligning with the trend
o Earnings coming in 2 days
o Structure a Calendar strangle for a downside

- Short term put
- Long term call

BTO Jun 180 Call at $37.6
BTO Mar 175 put at $22

( If I am bullish, I would have structured a Longer term put and short term call )


Feb 13th 2008

Results was out in 2 days and trend went AGAINST the trade

o STC Jun 180 Call at 68.4
o STC March 175 put at 8

Gains on call : 68.4- 37.6 = 30.8
Loss on put : 22 – 8 = 14

Despite guessing WRONG on the trend, there was a profit of 30.8-14 = 16.8