During the past two weeks or so, I have written two articles about calendar spreads and used Intuitive Surgical (ISRG) as my recommendation to employ this strategy due to the wide spread in the Implied Volatility (IV). As a reminder, I recommended selling the October 520 Calls and buying the November 530 Calls due to my bullish attitude about the stock, but I was somewhat concerned about the earnings release on October 16.
Last week, we saw a significant drop in ISRG to less than $490 during the intra-day and I posited that this was due to the price corrections in both NuVasive (NUVA) and Edwards Lifesciences (EW). In addition to the selling pressure in the overall market last week, these companies disappointed the Street, and were punished severely. Both NUVA and EW are healthcare/medical equipment suppliers in the same business sector as ISRG, and ISRG was simply moving in sympathy. In addition, it may have been viewed as a warning for investors in ISRG of what may be in store for them on October 16.
Well, it did not turn out that way, but you would not have known this based upon the initial trades in the aftermarket following the earnings release. I saw trades from $495 to $510 and could not understand what they read in the report to justify the 7% drop from the close at $533. The opening on October 17 at $510 and the action that followed with trades above $544 were more in line with my expectations and forecasts.
With that said, the expiration of the October $530 Calls is only two days away and this is looking to be a fantastic winner for those that took advantage of the IV differential. If you may recall, my net debit per spread contract is $4.20. The chart below is the one that I included with the first article and analysis, so let's see how close I am to these anticipated prices on October 19.
ISRG November 530 CALL Price on October 19 with 28 Days to Expiration
ISRG Market PRICE
Expected CALL Price with 37% IV
Expected CALL Price with 27% IV
Expected CALL Price with 22% IV
If you hung tough when ISRG broke below $500, your pay day is rapidly approaching, but stay alert as the volatility has been increasing and the positions will need to be closed and/or covered. In addition to the ISRG trade, there have been numerous calendar spread opportunities in other stocks the past week in advance of the October expiration and earnings releases.
Somewhat along those lines, but not a true calendar spread, have been my trades in Aegerion Pharmaceuticals (AEGR). It has been paying off since last week with the October IVs ranging from 475% to 550%. No, that is not a mistype on the percentages and I was equally shocked, so I sold the October $12.50 Puts last Friday, October 12 and added to my position again on Monday and Tuesday with contract prices ranging from $2.65 to a low of $1.00 as AEGR continued to rise. I am not long AEGR and I only bought a limited number of the November $12.50 Puts on Tuesday to protect the short position and create a "partial" calendar spread, so to speak.
I did this in advance of the FDA Advisory Committee review on Wednesday of AEGR's drug, Lomitapide, in the event that the stock could collapse from the high teens down to very low teens resulting from a negative vote or recommendation. AEGR was halted for the entire trading day on Wednesday and opened even higher on October 18 due to the favorable vote that AEGR received from the committee for Lomitapide. While this trade is not a true example of the calendar spread strategy as I used and recommended with ISRG, the IVs on AEGR were so ridiculously high and so far out of the money that I took the risk and only protected some of the short puts.
If this is published in time, look at calendar spreads on Riverbed Technology (RVBD) and SanDisk (SNDK), both reporting earnings after the close on October 18, 2012. This is a trade for the last hour of the trading session today, assuming the deltas in the October and November IVs are significant enough to justify the trade. I would like to see at least a multiple of 3 in the IV differential. I am looking at the Puts vs. Calls with both of these securities, but I am sorry that I do not have time to substantiate my position from a technical and fundamental standpoint and have this published in time.
Disclosure: I am long ISRG. I have calendar spreads on ISRG and AEGR and may do so with RVBD & SNDK in the next 24 hours.