Creating Weekly Options Windfall Profits with an Earnings Calendar Spread Play…
Here’s a great little weekly options trade that was passed around our trading group recently. Actually this options trading set up can be played on stocks with both (or either) weekly option or the traditional monthly options.
One thing to keep in mind is that this option strategy play should be considered more of a ‘spec’ earnings type of option trade than a monthly option income trade – however it could become a strategy that could be played repeatedly with good success once one has traded it enough times and gets the ‘hang of it’.
Here’s how it works –
First we want to find a stock that has an earnings announcement coming up soon – and if we wish to play this strategy with weekly options we would need to make sure we find stocks with weekly options. Second, and we want this earnings announcement to occur AFTER the front month/weekly (or the ‘current month/weekly’) expiration.
So, for example, if it is January, and there is still a week or two until the January expiration day, we want to find a stock that has an earnings announcement that occurs AFTER that January expiration date. A week or so after the front month expiration date is ideal.
So again, what we are looking for in this options trading strategy is around a week or so of time before the front month expiration date – on a stock that has an earnings announcement just AFTER that front month expiration date (we will show an example of this below).
Then, once we find this type of a set up, we will be looking to put on a calendar spread either at the money – or very close to at the money – where the underlying stock is currently trading at.
Here is the thought behind this trade:
Typically what happens with options is that when there is an earnings announcement – or some type of ‘news event’ with the underlying stock – the volatility levels in the trade rise up and stay up until the ‘event’ passes (either the earnings announcement or the news event). It’s not uncommon to see the volatility level stay at higher levels until the moment the earnings announcement is released – and then, immediately – the volatility levels drop back to a lower, more ‘normal’ level – sometimes within seconds.
So, with our above set up, we are looking to place a calendar trade on an stock where we are buying an option in the ‘next month’ – the month where the earnings announcement ‘event’ is going to occur – which means that the volatility levels should remain high at least until the earnings announcement event takes place. The value in those options will stay raised up – and perhaps even continue to rise – even maybe increasing in value – up to the date that the earnings are released.
On the other side of the trade we are looking to SELL an option (at the same strike price – creating a calendar spread) using options in the front month. Options which will expire BEFORE the earnings announcement. There is much less ‘uncertainty’ with these options as the earnings announcement will really in no way effect them due to the fact that they will be expiring before the earnings announcement is released.
In other words, the options that we will be selling will decay at more of a normal rate – while the options that we will be buying behind it will very likely hold their value and not be effected as much – at least until the earnings announcement takes place. In fact, it’s very possible that these options that we will be buying could actually INCREASE in value due to the volatility and the uncertainty from the upcoming earnings announcement – while our sold ‘front month’ options are decaying and putting money in our pocket at a normal rate.
The difference in this scenario – or the ‘spread’ – is our profit. And with this type of a set up it can be significant – creating a real monthly – or weekly options windfall profit – and much more ‘boosted’ gains than just normal type of calendar spread play.
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