EOG: a Double Calendar Spread, earnings with a twist…

Using the LiveVol Pro software I came across an interesting skew in EOG Resources Inc.

As you can see in the below LiveVol Pro skew tab the Apr ATM options are trading at a very large IV premium to all back months. I say “with a twist” because earnings are after the Apr options expire (5/4/2010).  Also note that the May options are trading at a relatively low IV considering they are the front month for the volatility event, earnings.

 

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With EOG at $106.92, I bought the following double diagonal trade 20 times: +1/+1/-1/-1 May $110c / May $105p / Apr $110c / Apr $105p  for net debit of $5.64 each spread.

My trade hypothesis is that the Apr options with less than 4 trading days to go will quickly lose extrinsic IV value and the May options IV will rise before earnings.  As you can see from the below LiveVol ‘earnings and divis’ tab, the majority of the time the ATM straddle rises in value and IV leading up to earnings and then IV crushes after the vol event. 

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I will most likely take my profit when the Apr options expire but I may hold the ATM May straddle (part or all) until earnings, but certainly not hold them into earnings.

The Thinkorswim analyze tab looks like this:

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I have mental stops at the breakevens $103.84 and $111.50 which equates to losses of $1400 on the downside and $1200 on the upside as of today.  I will look to exit with $1000 – $1200 profit if it is available right away.  According to the above analysis the trade has a 66% chance of being profitable by 4/17/2010, so 2:1 chance of success with a 1:1 P:L.

*This is not a trade recommendation.

As you can see from this and previous trades that I’ve posted, my goal is to find a theoretical edge based on my predictions of where the implied volatility is going and not where the underlying is going.  I highly recommend the LiveVol software for this way fo trading.  (Click here to check out Live Vols homepage and here for their blog.)  I sometimes trade with more directional conviction and I’ll post those too in the future time permitting.

2 Responses to EOG: a Double Calendar Spread, earnings with a twist…

  1. Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Cheers
    Christian

    • Hi Christian, thank you for the feedback, I really appreciate it. It’s nice to know people are reading my work…

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