GOOG Earnings Play/Calendar trade (weeklies)

[chessiq 0]

A couple of weeks ago (3/28/2013), I had opened a Calendar trade BTO GOOG May $800 Call and STO GOOG April $800 Call. $5.05 debit.

My intention was that Theta gains would outweigh Volatility losses. After a few days, it occurred to me that the Volatility losses would far outweigh the Theta gains. (Well, it appeared like that at the beginning - but it seems like most Theta gains happen at the end, which makes sense.)

So, on 4/2/13, I rolled down the May $800 call to April Week 4 $800 Call. $3.20 credit.

My intention was threefold: 1) to reduce possible loss by getting some money back, 2) to reduce the difference in Volatility between the two trades as they would both be close to the earnings date (4/18/2013 AC) and 3) to bet on "Theta spread" between the two positions being wide enough to make money on the trade.

I am planning to hold this position til Thursday morning, i.e. the morning of the earnings day.

The Theta difference for these calls is about $1.20, I believe, (-$2.08 v -$0.84), but I am a little confused on the Vega 0.32 v 0.53, [April v April Wk4, respectively].

What could make this trade a loss trade? Does the Vega, as listed, mean that the "advantage" (i.e. vega positive?) is to the April Call (with the lower vega)?

Many thanks for your help!

[Kim 7,512]

This is the concept we have used successfully with AMZN, GOOG and few other stocks.

 

I think your problem was entering too early. I tend to enter those trades 10-14 days before expiration, and you could get the same trade few days later for 4.30-4.40.

However, even with less than ideal entry, the trade is worth about 5.50 now. Not sure that rolling was a good idea.

[chessiq 0]

This is the concept we have used successfully with AMZN, GOOG and few other stocks.

 

I think your problem was entering too early. I tend to enter those trades 10-14 days before expiration, and you could get the same trade few days later for 4.30-4.40.

However, even with less than ideal entry, the trade is worth about 5.50 now. Not sure that rolling was a good idea.

I am considering holding this through earnings today... and the leg expiring this week expiring worthless and the one expiring next week having value approx $2, hopefully. Of course if earnings suck, they may both be $0 come Monday. Your thoughts?

[Kim 7,512]

First, with the stock at 767, you will be VERY directional. Even if the stock doesn't move, I doubt that 800 weekly calls will be worth more than 1.50 best case. If the stock does move but lower, you might be looking at catastrophic loss.

[chessiq 0]

I closed it at a loss... overall around $0.50 loss per contract/spread.

 

I intended to be directional, but I felt you were right that results could be horrible. My choices were 1/ lose it all if stock tanks, 2/ lose a significant portion if the results were decent and the stock moved towards $800 starting tomorrow and onto next week, and 3/ make some good money if the results were exceptional and the stock moved very close to $800 tomorrow - and then past $800 next week. I decided to be conservative and try not to find out.

 

I appreciate your timely and thoughtful feedback/responses.

[Kim 7,512]

I think that each trader has to decide if he wants to limit the losses or maximize the gains. Usually you cannot have both. My strategy of selling before earnings is intended to limit losses and aim for small but consistent gains. This is very predictable strategy, hence I can allocate 10% per trade. If you hold through earnings, you can hev some very nice gains, but if the stock doesn't cooperate, the losses can be catastrophic. It doesn't mean you cannot do both, just the second strategy has to be done with much lower allocation (3-4% maximum in my opinion), so even higher gains will have less impact on your account.

[chessiq 0]

Totally agree that lower allocation is best. The calls are now $8 each :-) /So, my thinking that it would be worth more than $2 wasn't a bad guess, granted a gamble. However, looking at the $830 calls, (my optimistic assumption of what the $800 calls would be worth if GOOG had tanked, I see that the loss would have been significant. A strangle (i.e. double calendar) held through expiration seems like an interesting idea if I don't pay too much for the d-c-spread.

 

Thanks again.