There have been a few trades today. I took a few chances to the short side, with pretty tight stops. However, it was pretty quiet and none of the stops were violated. AVY is against me slightly today (Oct 65-60p spread), bearish target 59.60.
I also put on a small AIG spread (July 75-70p), This is positive theta as long as it stays below 72.45. The spread earns if the underlying stays put,or drops.
AIG Double-topped a few days back, I'm playing the retracement. We will see. Shorting this market is a more difficult approach.
Max Loss - $145 + commission (stop @ 72.65)
Max Gain - $980 - commission (underlying expires under 70)
Time Stop (expiration) July 20
Earnings Play.
I tend to like these low risk plays.
PDCO. I sold the high volatility June 35 puts and bought the July 35 p. I bought the spread for a .14 debit. I put 32 of them on for a relatively low risk trade.
Max Loss = 448+ comm
Max Gain (with a drop in Vol by 6%) = $2108 - commission
Time Stop (expiration) June 15
Breakevens: 33.10 and 37.70 (with 6% drop in Vol)
Here is a chart of PDCO.
Earnings takes place after the close on May 24
Happy trading
Comments (2)
Jon—I love the trading blog. I will keep an eye on it for sure. I was just discussing Calendar spreads with a friend last night, so some of this is very timely—Basically, that is what you have in the PDCO trade? I am confused, however, at your max loss—If you sold the June put—presumably for a credit of roughly 1.20, and bought the July for .14, I don’t see how you can have that max loss. Did you buy the July for 1.4 maybe, rather than .14? Because I also don’t see where that put could be bought for .14!
Also, what little I know about this type of trade has suggested that you would want your long put farther out—is this a typical move for you with the long put so close to expiration as well? In any case, this looks like a great trade after a quick glance at the chart, although I would assume you checked the past history of earnings reaction on this stock, which I didn’t do.
I have to hit the gym, but again I appreciate you taking the time to make this information available. I’ll try to not bombard you with too many questions!
Regards—M
Posted by Anonymous | May 23, 2007 7:06 AM
Posted on May 23, 2007 07:06
M,
here are the nuts of the calendar trade. Definatly look at my EK trade, it is a perfect Back-2-Back calendar set up. Perhaps even longer.
the June/July calendars I usually sell for a package, in the case of the PDCO trade I sold June 35p for 1.24 and bought July 35p for 1.38. net debit is .14 , therefore my max risk is $14 per spread. My two risks are a Volatility Crush, where the July options trade for a tiny amount. Or a huge stock move.
I could have chosen a longer term Calendar i.e. Jun/Oct, currently .80 per spread. Obviously, my debit (risk) increases dramatically. And my time frame for this trade is only 3 to 24 days.
Some people like to buy October and sell, June, July, Aug, Sept against it. That is fine, I just haven't seen too many stocks lately which sit tight for 4 months. It doesn't mean that I don't keep looking though. I look for a stock that has a big earnings shock, then typically trades sideways for awhile. Right after the earnings shock the Vol is still pretty high.
There are several different ways to approach the calendar, however I prefer the B2B calendar in many cases. I can put the trade on for a very low cost and increase the number of contracts. Thereby, buying 5X contracts for .14 and selling them for .35 is a double on my equity in less than 30 days. I guess I could buy 1X contracts for .80, and try to sell them for 1.20. but I like the ROI on option 1 better. If I continue to like a sideways trade in the stock, I always have the opportunity to sell July against Oct next month. But usually I find another good B2B calendar setup.
I usually do 4 or 6 trades like this month (about 1/4 earnings related). Again, look at my EK trade for what I like in a more trending stock.
hope this helps,
jon
Posted by Jonathan Lawson | May 23, 2007 7:08 AM
Posted on May 23, 2007 07:08