Possible New Strategy - Calendars Before Earnings

[tjlocke99 18]

Hello my SO friends. I want to float a new potential earnings strategy leveraging an old article Kim posted on Apple many moons ago. I also want to let you know how much I appreciate all the help I have received on this forum over the past 6+ months.

The idea is around 1-2 weeks before a stock is going to report earnings you long an option that expires after the earnings date and short an option that expires before the earnings date. Obviously this will only work for certain stocks at certain times of the year and works better with stocks with weeklies. Additionally I like the idea of getting in the position on a Thurs and exiting around a Tuesday to capture that theta decay with less gamma risk. Does anyone have any experience wit this?

I tested GS for a few periods and came up with the following results. I rounded the profit DOWN a few percent because I really am beginning to think its rare to see fills at or very near the mid-point unless the option is extremely liquid or you get a little lucky.

All positions were opened on a Thurs COB leaving 8 days until the short would expire and around 15 days on the long (normally I'd probably open them during lunch Thurs because that's the only time that would work for me and because there is probably some good theta decay that afternoon as the MM's adjust the weekend theta into the price).

All positions were closed on the following Tuesday thus holding for 5 days. Tuesday was not the day of highest profitability. Its just a rule I set to make the testing easier.

GS Earnings Report Date: 7/17/2012 BO

7/5 stock closed at 95.92

Long JUL 95 Call

Short JUL2 95 Call

Net Debit: .95

Close 7/10 at +22: ~ 20% gain after slippage

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GS Earnings Report Date: 4/17/2012 BO

On 4/5/2012 the stock closed at 118.00

On 4/5 enter the following double calendar (to not be delta negative or positive)

Long 120 Call / 115 Put Apr 20 2012

Short 120 Call / 115 Put Apr 13 2012

Net Debit: 2.13

Close on 4/10 at +.34: ~ 12% gain after slippage

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GS Earnings Report Date: 1/18/2012 BO

On 4/5/2012 the stock closed a 94.58

Long JAN95 Call

Short JAN2 95 Call

Net Debit: .98

Close on 1/10 at +.22: ~ 20% gain after slippage

I DO NOT KNOW WHAT THE MARGIN REQUIREMENT IS ON THESE CALENDAR TRADES, BUT I THOUGHT THERE WAS NO MARGIN REQUIREMENT BECAUSE THE MAX LOSS IS THE FULL DEBIT RIGHT? Therefore I calculate the P/L based on that debit amount.

NOTE: I know the Profit will be lower because I don't think you can get good fills near the mid. That is why I accounted for a few % of slippage.

Obviously this very LIMITED testing, but I am floating the idea in case anyone wants to help test or in case anyone has experience.

Thanks and Merry Christmas and happy holidays!

[Kim 7,943]

Richard, I started doing similar strategy with MA and CRM. I used weekly options that expire after the report for short legs - the idea is that for many stocks, they are overpriced when they are issued. We had some losers when using those weekly options for our long strangles - so why not to short them? But your idea is good as well, will need to do some backtesting.

[tjlocke99 18]

Thanks Kim! One concern I have is the trade could easily lose 80-90% of its value if there is a huge move. However that is true of any theta based trade.

[cwelsh 1,551]

Ok, the more volatile stocks do not really work (just finished again AAPL, MA, GOOG), checking the less volatile now

Edited December 5, 2012 by cwelsh

[tjlocke99 18]

maybe its better to take the opposite trade on those volatile stocks! what stocks would you consider less volatile? Exxon, Walmart, IBM?