New Trade: Goldman Sachs (GS) Put Calendar on Options Action

by Dan October 12, 2012 3:23 pm • Commentary


Here’s a preview of what I’ll be talking about on Options Action tonight at 5pm on CNBC.

As Enis mentioned in the Name That Trade post earlier today, the Oct / Nov 41 put calendar that I traded last week ahead of JPM earnings has worked out quite well.  Rather than trying to re-invent the wheel, I figured I’d go with the same structure on another financials name that has had a big run higher into earnings, and also has an options term structure that makes calendars quite attractive.

Enis detailed the low level of November implied volatility in GS in his post.  I’ve included the post below.

Volatility: GS implied vol tends to settle in the mid 20’s following earnings. November vol is already at 27 vol so will not get hit too hard. I want to own Nov and finance it with the higher vol in October.

Event: GS report Q3 earnings Oct 16th ,Tuesday pre-open, the options market is implying about a 3% move vs the 4qtr trailing avg of about 3.375%.


TradeGS (120.75) Bought Oct/Nov 115 put calendar for 1.40
  • sold 1 Oct 115 put at 0.52
  • bought 1 Nov 115 put for 1.92

 Break-Even on Oct Expiration:

-If stock 115 or higher, the Oct 115 Puts will expire worthless and and I will own the Nov 115 Puts for 1.40 at that point I will look to spread them.

-If stock moves below 115 I will make the difference btwn the Oct that I am short and the Nov puts that I am long.

-My max risk is the 1.40 I paid for the Calendar


***Just Like last week, I put this on in very small size as I will re-evaluate my strikes on Monday, Prior to GS’s earnings Tuesday morning.



Original Post Oct 12th, 2012 at 12:21pm:  Name That Trade: GS calendars, and JPM Recap

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.