Welcome back Swimmers.

Let's take a look at the Alcoa calendar trade we were following going into the company's earnings announcement on July 8th. I will be using thinkBack to look at a couple of key points we talked about before. Let's refresh our memories. First, we said we can expect implied volatility to rise going into the earnings date on both the front-month July and the back-month August. Second, we said that we could buy the calendar for .89 a couple of days in advance of the earnings date and looked at the Analyze tab to see how far the stock could move in either direction in order for us to keep our money on the trade. So, using the thinkBack tab, let's take a look at the implied volatilities at the close on July 8th prior to the earnings announcement.

As we can see the implied volatilities of both months are decidedly higher than where they were from the first post. In all fairness, the market has sold off pushing implied volatility levels higher in most stocks, but Alcoa is around the same level price-wise that it was from my first post. The rise in implied volatility is due to the uncertainty of the earnings and future revenue announcements. As we stated above, the calendar value prior to the earnings date was .89, meaning that for $89 you could buy the July/August 32.50 calendar. Also remember that a long calendar position is a short gamma, long vega position that maximizes in value if the stock is resting at your short July strike at expiration. However, you didn't need to hold the position till expiration to make money on this trade. Let's take a look at the value of that calendar on Friday July 11th. The value of that same calendar is now 1.15, with the stock trading $34, so we made about a 28% return in a matter of a week. That is not bad, and given the market sell-off recently, any gain is a good gain. Happy trading everyone!

Joe Mazzola

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.