Calendar Spread prior to earnings

Discussion in 'Options' started by timetotrade, Apr 21, 2008.

  1. Anyone do long calendar calls just prior to earnings when the IV on the near contract is 10% or more than the next month's IV. For instance, in AMZN, selling the May 80 or 85's with an IV of 12 to 14% above the June 80 or 85's which can be bought. Some of the posts I have seen on ET mention using calendars when there is lower volatility, but how about when there is a time skew? Anybody do this type of trade?
  2. Sure, but more often than not you get killed on gamma and net-vegas.
  3. BobJones


    I use this spread a lot around earnings. I usually put on the out of the money call and put calender. One thing i would make sure of is that they back month vol hasn't been pushed up a lot with the front month or you may not make as much as you thought.

    Calenders generally present much less risk than vertical spreads and naked options and can produce decent gains on volatility plays.
  4. rickf


    I had a calendar spread on last summer for ISRG. The day of earnings, I closed the position -- which was a f---king brilliant call because the underlying exploded like 60 points and would not have boded well for that strategy from that point into expiration.

    I learned not to get tempted by attractive premiums on calendar spreads and haven't used them since, preferring basic verticals and the occasional short strangle.
  5. What was the calendar spread that you put on? I am looking at just putting on spreads prior to earnings and then taking them off after the earnings come off BUT ONLY when the front month has higher IV.
  6. rickf


    IIRC it was June-July (or July-Aug) 150 calls -- it was early on in my options-trading forray and I didn't do a decent job on my homework regarding the greeks.

    I had the right idea on the stock -- ie thinking it was going to pop up, but the wrong strategy.

    Frankly while I do the occasional option trade I'm doing much more in futures now than options -- less greek to worry about. :)
  7. BobJones


    Calenders produce less risk than verticals or strangles, and he was looking to make a volatility play not a movement play. DD had earnings yesterday the long call calender cost about .40 to sell the call vertical you would have had 1.55 worth of risk. that's a difference in risk of a 1.15 per contract. For strictly IV plays calenders can work well assuming you know where the IV normally trades at and how much each month has been pushed up before earnings
  8. Comparing the calendar with the SELLING the vertical is almost apples to oranges since they are quite different strategies. Therefore you cannot simply blindly compare the risk of the calendar versus the vertical without analyzing the strikes, volatility, time to expiration and the underlying assumption of where you expect the stock and volatility to move to to determine the better strategies to take advantage of those expectations.
  9. BobJones


    That's absolutely true, and of course every situation is unique and generalizing can get you into trouble...but the originally question seemed generally with no prices or IV provided
  10. After the bad news on Netflix last night, I checked out the IV of the May and June options on NFLX. The May puts and calls had IV of at least 15 to 20% above the June options. Unfortunately, both expiries had IV sucked out of them today (after the earnings) so there was not much of an advantage in trying to sell May against the June. I had hoped for the June to hold the IV better than it did. So I guess that I will forego that strategy with AMZN ahead of earnings.
    #10     Apr 22, 2008