The Tale of Two Trades – PDCO and AIG. May 22

Here are two trade taken for Different reasons. AIG technical pattern, and PDCO Volatility related earnings play

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

2 thoughts on “The Tale of Two Trades – PDCO and AIG. May 22”

  1. 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!

  2. 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,

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