During the past month, I recommended calendar spreads on several stocks - Intuitive Surgical (NASDAQ:ISRG), Aegerion Pharmaceuticals (NASDAQ:AEGR), Riverbed Technology (NASDAQ:RVBD), and Sandisk (NASDAQ:SNDK).
I financially committed to all of these trades with out-of-the-money calendar spreads except for Sandisk and I did so prior to the earnings releases. AEGR is the exception to the latter as it was done in advance of the FDA Advisory Committee review of AEGR's drug, Lomitapide. I chose not to do the SNDK trade because I did not see favorable trading action in the options in the last trading hour of October 18. All of these trades have paid off very nicely, and just today, I sold my RVBD November 20 Puts due to the massive 20% drop which is a direct result from its 'dubious' deal to acquire Opnet Technologies (NASDAQ:OPNT); at least, the Street has opined that it is a lousy deal for RVBD. I have already read several favorable articles from contributors with the counter-arguments for the acquisition.
Bottom line, the net debit on the RVBD Put Calendar Spread from October 18 trades was $.25 and the payout as of today is $2.95, an 1100% profit in less than two weeks. Thus far, the RVBD spread has returned the best payout of all of the aforementioned trades spreads, but I am still long the November Puts on AEGR which I am holding until the earnings release scheduled for November 7. Call me lucky with RVBD since the initial move in the stock was bullish (against me) after the earnings release on October 18, 2012. While that is an accurate statement and as I mentioned in the article published on October 18, the Implied Volatility (IV) on the October Put was more than three times the November Put. It was worth the risk with that IV differential. At this point in time with today's price movement and RVBD at $18.00, I would be reversing my stance and do a Calendar Call Spread if the IV's on RVBD were favorable.
So, where am I going with his article other than to 'toot my own horn'? I really hate doing so as it irks me when others do, but it does help with my credibility and will generate more comments and feedback. So ask yourself, what is the common element in all of these trades? It may be obvious that they were all done in advance of an 'event' where the outcome is in question, and therefore, the near-term IV spikes well above the historical levels in advance of this uncertainty.
While it is fantastic to also be correct on the anticipated price direction, when the IV on the short option is more than triple the IV on the long option, it may not be necessary for a very profitable trade. I am not saying that the IV differential can be so significant that the trade is a no-lose situation, which of course is NEVER the case, unless the net debit on the trade is $0 and you have determined that every possible outcome will not yield a negative return. However, the risk-return ratios with the significant IV differential are highly favorable and certainly justify the calendar spread trade.
With that said, we are in the middle of an earnings season with a market that severely punishes those that fail to meet expectations. So what am I looking at for the balance of the week? Sorry to say that you will have to stay tuned as nothing has appeared on my radar ... yet. After my incredible experience with Edwards Lifesciences (NYSE:EW) on October 19 at option expiration, I am looking forward to November 17. I will be furiously searching for the stock with an 'event' and the related uncertainty, as in the case of EW, but I will not repeat my error of October 19. I am displeased that this blog has not been read 10,000 times but I direct you to it nonetheless for an education that will be extremely enlightening.
Disclosure: I am long AEGR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At of the writing of this article, I sold all of my RVBD Nov Puts and am still Long the AEGR Puts.