Name That Trade: GS calendars, and JPM Recap

by Enis October 12, 2012 12:12 pm • Commentary

Let’s start with a recap of how implied volatility has moved today after JPM’s earnings report.  Dan initiated a Oct / Nov 41 put calendar on JPM to sell the implied move, and potentially play for a grind lower.  Luckily for him, today’s price action in JPM is close to ideal, as the stock has moved lower, closer to the Nov 41 strike, while the Oct 41 strike has been hit by the vol crush.

What surprised me when looking at how JPM implied volatility behaved this morning was how little November implied volatility moved.  JPM implied volatility is 2 points lower in Nov, on a move of JPM that was basically unchanged.  To me, that’s a strong sign that traders are reluctant to sell November options any lower, despite the fact that JPM traded in a tight range since QE3, between 40 and 42.5.  This is also a result of traders not pricing in much of a move for JPM earnings in the first place, so it’s hard to sell JPM options much lower, even after the event has past.

I’ve mentioned before that the elections, fiscal cliff approaching, and year-end selling could induce macro volatility before Nov expiry.  Traders seem to be latching on to the idea of owning November expiry.

Using that idea for earnings events next week, I wanted to look at similar calendars in GS ahead of the earnings reports next week.

First, here’s the GS front month options:  


The 120 call calendar and 120 put calendar are similarly priced (around $1.80).  The reason it looks attractive to me is that GS has moved less than 2% on 5 of the last 8 earnings reports, but also because November implied vol at 27 can’t go much lower.  Here is a chart of 30 day implied volatility in GS over the last 2 years:



The earnings dates are tagged with E.  You can see that implied volatility is quite low overall, but especially before earnings, as GS Nov options have priced in much of a move for earnings.

I looked at MS calendars as well, but Nov implied volatility is not as cheap relative to its 2 year history, and MS has been much more volatile than GS on past earnings.  In short, GS might be setting up for a nice long calendar position before next week.