Rocketship GS

Goldmansach has shot up quite a bit this week. It was around 180 earlier this week and then now its 192. From a candlestick aspect an anbandoned baby pattern is starting to form. Meaning that if mondays price gaps lower and stay lower its a bearish situtation. However if it continues to trend higher than I will need to adjust my position inorder to stay with this earning play. So far i'm down $94 on a $950 risk.



Existing postition




With 195 put calendar if price continues to rise

GS earnings calendar

Goldmansachs is having earnings June 2. So it a good candidate for a calendar spread. The June 2 earnings event will increase the June contracts while allowing the May contracts to decay quickly.

BTO May/June 180 Put for $4.55
Risk to reward will be 1:1
Breakeven are $170 and $191

Volatility

Volatility is a prediction that a stock will likely more. A high IV will mean that stocks has high probability that it will move one direction or another.

Debt spreads generally do better with increasing volatility.
Credit spreads generally do better with decreasing volatility.

Examples of debit spread
bull call spread
bear put spread
long call
long put
calendars

Examples of credit spread
bear call spread
bull put spread
short call
short put

AAPL double calendar earnings play

On 3/25/08
BTO April/May 130 put calendar for $3.29
BTO April/May 160 call calendar for $3.12

Earnings was going to be released 4/23/08 so that meant the IV would increase and stay higher than the front month. IV for front was 46% and back month 51%. This a negative skew of 5%, not really good for a time spread but I knew that IV would increase in the back month so I didn't care about the front month.

Exit on 4/15/08
STC April/May 130 put calendar for $3.09
STC April/May 160 call calendar for $4.66

IV for front month is 45% and back month 56%. Nice profit of $1.34 or 21% return in 20 days. Not bad. I noticed at if I exited today, I could have got a 24.5% return. The current price of $157 is very close to the 160 peak.

I really like this double calendar strategies on stocks that are about to have earnings. Watch out for other trades similar to this in upcoming postings.

Componets of any trade

There are three things that make up all options trades
1. Price (delta)
2. Time (theta)
3. Volatility (vega)

Most of the time price is hard to control so you must rely on time and volatility.
Time is just selling premium. To generate a monthly income you need to sell premium and let time decay work in your favor.
Volatility is select strategies that will capitalize the change in volatility. Calendars are great for options that will increase in IV such as earnings and when IV is near the low of historical IV. When IV is higher than normal than using credit spreads will benefit the most.