Earlier, Dan previewed the HPQ earnings that come after the close today. Looking at potential trades the thing that immediately sticks out is the vast difference in implied vol between the weekly options and the next few regular month expirations. You can see that visualized here in the skew chart (red is the weeklies):
Obviously, with expiration on the weeklies tomorrow the implied vol isn’t that real, but June and August at 31 and 25 vol respectively isn’t that high historically, and trades that look to finance the purchase of those months by selling weekly vol at 120+ look attractive. So here are some hypothetical trades based on that premise that depend on directional biases:
Hypothetical Bullish:
Buy the May22nd/ June 36 call calendar for .20
– Sell 1 May22nd 36 call at .17
– Buy 1 June regular 22 call for .37
Hypothetical Bearish:
Buy the May22nd/ June 31 put calendar for .20
– Sell 1 May22nd 31 put at .14
– Buy 1 June regular 31 put for .34
Rationale – Even though the weekly options are dollar cheap, the sale at nearly 100 vol points higher than the June options covers a lot of potential scenarios for the stock. On each trade the desired result is a move towards that strike without going too far through. Even sideways movement in the stock is likely to result in a very small profit on each trade. The nightmare scenario is a massive outsized move in either direction, but with only .20 at risk on each trade it’s a fairly well defined risk.