We are going offer volatility trades going forward that include skews in equity volatility, specifically ones where then near term volatility is either significantly higher or lower than back month vols. Calendar spreads around earnings offer tremendous returns with little risk, and since we aim to create asymmetric positions, this fits into our model.
Yesterday we entered into this position:
| Calendar Spread | |||||||||||||
| AMZN | earnings 1/29 aftermarket | ||||||||||||
| 1/29 close | 1/30 | ||||||||||||
| Expiration | Type | Strike | Position | Imp. Vol | Price | debit | Price | change | Price | change | |||
| 1-Feb | put | 255 | -10 | 108 | 5.23 | 3.2 | 6.55 | 3.75 | 6.55 | -6.37 | |||
| 15-Mar | put | 255 | 10 | 42 | 8.43 | 10.3 | 0.18 | -0.18 | |||||
| 1-Feb | call | 285 | -10 | 104 | 5.84 | 2.85 | 5.95 | 3.05 | 5.95 | -5.63 | |||
| 15-Mar | call | 285 | 10 | 40 | 8.69 | 9.00 | 0.32 | -0.32 | |||||
| tot debit | 6.05 | Current | 12.00 | ||||||||||
| return | 98.3% | ||||||||||||
The key is the implied volatility spread between the weekly options that have earnings exposure and the March options. This is a double calendar, so direction moderately in either direction will enhance the returns. Provided AMZN falls into the 255-285 range, the long legs will have unlimited return potential. The trade was opened for a $6 debit and is now worth $12, as the weeklies should expire worthless.
Today we started a similar trade in FB:
| FB | earnings 1/30 AH | ||||||
| Expiration | Type | Strike | Position | Imp. Vol | Price | debit | |
| 1-Feb | put | 29 | -50 | 150 | 0.72 | 0.55 | |
| 15-Mar | put | 29 | 50 | 50 | 1.27 | ||
| 1-Feb | call | 33 | -50 | 146 | 0.96 | 0.61 | |
| 15-Mar | call | 33 | 50 | 50 | 1.57 | ||
| debit | 1.16 | ||||||
With volatility in the calendar structure diverging to this degree, the underlying must make a huge move, around 10% in two trading days, for this trade to be a loser.
