I was looking through the list of stocks that will report earnings this week.
Surprising, I found that GS might be a good trade to enter.
Straddle on GS
Price 189.30.
Earning date: 10/15/2009 (Thursday) BMO
IV is around 2 year low.
BTO Oct 16, 2009 190 call at $4.1
BTO Oct 16, 2009 190 put at $4.85
Net debit $8.95
BE - 181.05 and 198.95.
The movement required for profit is around 5%.
Primary exit: 10% profit
Secondary exit: Take a loss 20-30% loss due to time decay
GS Historical Earnings price Movements
Earnings date Pev. day close Movement with onetray day
Jul 14, 2009 $149.44 +1.14%
Apr 13, 2009 $130.15 -11.56%
Dec 16, 2008 $66.46 +17.36%
Sep 16, 2008 $135.5 -14.29%
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Joseph, I think this is a good Vegas trade. Probability for success is high. But you have only 2 days to close the trade after earnings.
ReplyDeleteA strangle with a call front month and a Jan Long put month may also work for higher profit if the stock goes higher after earnings. It becomes a calendar strangle.
Because of the volatility after earnings, even you are wrong, you may still make some money.
Thanks for the comment.
ReplyDeleteA question about the calendar strange. Usually the long call has later expiration date than the long put. The reason is that the price drop will be faster than price increase. Jan 195 call and Nov 185 put might be better than Jan 185 put and Nov 195 call. What do you think?
Joseph,
ReplyDeleteMy understanding is as follows:
1. If you have a Jan 195 call and Nov 185 put, you are placing a bearish calendar strangle. You put will go up faster if the stock goes down
2. If you place a Jan 185 put and Nov 195 call, you are placing a bullish calendar strangle. You will make more money if the price goes up after the event.
I believe if you look into the delta characteristics in reaction to volatility and time, you will get the answer.
Any comments from anyone?
I think I am a little mixed up on my last comments.
ReplyDelete1. If you have a Jan 195 call and Nov 185 put, you are placing a BULLISH ( not bearish )calendar strangle. The long call is a primary instrument and have more time value. The long put is acting as a PROTECTIVE HEDGE.
2.2. If you place a Jan 185 put and Nov 195 call, you are placing a BEARISH ( NOT BULLISH ) calendar strangle. The Long Put is a primary instrument and the call is a PROTECTIVE HEDGE.
When in doubt, it is good to check the position delta.
I hope none of you is confused! My apologies.
Strangle and Straddle are such flexible trades and I like to introduce more PE and SE
o If bullish, close at predetermined % ROI
o If bearish, close the long put at a % ROI gain. Now the LC is risk free.
or Look to close the LP when the stock has found bottom
SE
o If bearish, adjust the LC to a long term bear call or bear call calendar
o If stagnant, adjust the LC to a call calendar and close the long put to capture any remaining premium
If you feel it is too difficult to adjust, just follow the simple exit less than 4 days!