Using the LiveVol Pro software I found GRMN with high IV before 5/5/2010 earnings. As you can see from the LiveVol skew tab below, the May options are trading at a large premium compared to all back months options.
In order to capture the high May IV I sold the ATM $38 put (64.3% IV) 20 times. I then hedged it by buying Jul 37 put (50% IV) 10 times and Jul 39 put (52% IV) 10 times to create a ‘vertical butterfly’ for a total net debt of 2.05. As you can see by the below P&L chart the breakevens are $31.68 and $45.39 (at current IV). With GRMN currently trading at $38.21 the ATM straddle is priced at $4.78 is predicting a move from $33.43 to $42.99, well within the range of our trade.
Below is the P&L for purchase of an ATM 38 May Straddle, you can see the breakevens well within the breakevens of our trade:
Below are the past four earnings releases by GRMN in the LiveVol Pro software. You can see in the upper line chart that the ATM straddle decreased in cost three out of four times. You can see in the lower line chart the front month IV collapsed significantly compared to the back month all four times.
I’ll monitor this trade and may take some profit before earnings if either back month IV increases relative to front month or vise-versa… I’ll keep you posted on the status.
Below is a comparison of buying the May Jul $37 calendar (green line) 20 times vs. the above trade (white line). They are virtually identical with a very minimal advantage to the latter trade.
*this is not a trade recommendation.