Tuesday, August 18, 2009

HPQ Put Calendar

HPQ is reporting earnings after the bell and is sitting right at 44 as I type. I have no idea what they will do after earnings but the implied volatility of the Augs are 60% while the Sept options IV is a more reasonable 36%. So we definitely want to take advantage of selling some August premium if we can. If I had to pick a direction I would fade the rally today and look to the downside.

Buy the Aug/Sept 44 put calendar spread for 90 cents.

Buy selling the Aug 44 puts and buying the Sept 44 puts we can expect to profit from the collapse in IV after earnings tonight and as long as the stock stays within about 42-46.5 in the next three days we make money. Max profit occurs at 44 this friday as the Aug put would expire at 0 and the Sept would be worth at least its extrinsic value. Although this is designed to be a earnings play held just overnight, manage it accordingly.

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