Monthly Income Trades in this Low Volatility Environment

Dan taught a webinar yesterday on Monthly Income Trades in this Low Volatility Environment.

Dan went over:

  • Delta Force starts August 13th
  • Reviewed trades:
    • RUT Iron Condor
    • SPX Weekly Iron Butterfly
    • AAPL Pre-Earnings Calendar
  • New trades:
    • SPY Bearish Calendar
    • AAPL Earnings
    • Iron Condors and Ratio Butterflies

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Pre-earnings Calendar idea in AAPL

AAPL Price Chart

This strategy can be employed in many vehicles, will use AAPL as an example today. AAPL is at $604 as I write this.

Here is my idea

Buy 1 August 605 call and sell 1 July 605 call (about 9 days from option expiration). The spread is going for around $15.60 ($1560 for 1 spread, expensive because of high price of AAPL). This idea can be used in cheaper stocks. It’s the same principle. The option volatility is around 33 for August option and 26 for July option.

Why the disparity? 

Earnings will be reported in AAPL after expiration of July options so July options won’t be affected and consequently will trade lower. August options will be front and center when earnings arrive and so the option volatility is higher and will continue to climb because AAPL can really move during earnings.

What does this mean to me as a retail options trader? 

It means one of the two foes you face as a calendar trader, price and implied volatility, will probably not be a foe during the length of the trade. Option Volatility risk (also call implied volatility) will be minimal at best, in my opinion, because August option volatility will stay pumped and July option volatility will stay low?

Does this mean I will make money? 

Not necessarily. You still have one more foe to deal with: price movement. AAPL doesn’t usually make big moves before earnings, but it can! If a stock is channeling and on relatively good behavior for one to two weeks before earnings, then this AAPL trade makes sense to me.

What would my plan be? 

Put the trade on now and keep it on until the latest, next Thursday July 19, the day before expiration. If the trade is still on, take off the entire trade.

What is the risk management plan while trade is on? 

If I paid around $1560 for the trade, I would be looking for around 10% profit, or $156 on 1 contract.

What would I do if the trade went against me? 

If I didn’t want to fiddle with adjustments, I would simply take off the spread if the price moved outside the expiration breakeven points of around $590 and $620. This would give me almost 15 points either way before I would have to exit the trade.

What adjustment might I use if I was contemplating adjustments? 

I might move the entire calendar I initiated at the 605 strike to the 620 calendar in the calls on the upside if AAPL reached $620. On the downside would take off the original $605 calendar and move it to the 590 strike in the puts if AAPL reached $590. There are other calendar adjustments, but this was merely one example of what I might to.

How long am I looking to stay in this trade? 

About 1 week. I would take the trade off at latest on July expiration Thursday.

Keep working on the craft! Put this on as a paper trade for next week to see how this trade works and e-mail me your feedback or questions, that’s how you get better!

Thanks!

Dan Sheridan
dan@sheridanmentoring.com

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