Using a Triple Calendar Spread to Trade Google Earnings
By J. W. Jones Oct 17, 2012 9:50 am
Here, a review of some of the data that an options trader should consider prior to constructing an option trade in order to profit from this earnings event.
Calendar spreads are usually constructed by selling the near month put or call and buying the same strike in the preceding month. In this case, note that the November options trade with substantially higher implied volatility than do the December options as a result of “bleed over” of the elevated October volatility.
The Google Triple Calendar P&L curve is presented below:
Click to enlarge
This trade is short term and is designed to be closed on this coming Friday (10/19/12). Note that the break even points for the trade are around $670 and $840 respectively. These break even points are outside of a double of the expected move. Based on the current implied volatility driven probabilities, this trade has an approximate 90% chance of successfully producing a profit.
This is not the elusive “free money” trade either. Since we have discussed that trade for several weeks, I think the reader gets the idea there is no such thing. Option trading success comes from constructing high probability trades and executing these trades in sufficient numbers that the statistical law of large numbers delivers the predicted success rates.
A corollary of this is not to “bet the farm” on any one trade. While we typically choose high probability trades, there is no such thing as “free money” and a low probability event cannot be allowed to curtail your trading career.
Editor's Note: JW Jones offers more content at OptionsTradingSignals.com.
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