Income Trade in GILD

[Steven Place]

The stock has gone parabolic, and implied volatility is pretty low. Now is the time for some mean reverting calendars.

Here is the trade:

Buy to open GILD Oct/Nov 100 put calendar for 1.60

THIS IS A TIERED TRADE SO DON’T GO IN FULL SIZE

*If* GILD hits 96 or 105 (and it will) then add another round of calendars.

[Steven Place]

GILD hit 105, time for the second round.

Buy to open Oct/Nov 105 put calendar for 1.55

[Steven Place]

I wanted to do a third round of calendars, but the problem (which is a good problem to have) is that the implied volatility has continued to rise. It’s sitting at 34%, and when we started this trade we were in the high 20’s.

The major risk is the upside risk, so I am simply going to put on a hedge to get me practically delta neutral.

The hedge is going to be different depending on what size you have.

IF you have fewer than 3 contracts on, buy the Nov 110/115 call spread for 1.75

IF you have 3-7 contracts on, buy the Nov 110/120 call spread for 3.00 (I’m doing this one)

IF you have more than that, just add more size on the verticals.

What I am doing is removing upside delta risk using call spreads while keeping my theta and vega risk around teh same. If GILD breaks out to 112. The trade is protected nicely on the upside and if GILD rips to 112+ we can roll the lower calendar higher and then close out the call spread for a profit.

[Steven Place]

Great trade in GILD– we can exit the trade now for 25% return on risk.

There’s a HUGE lesson here…

We picked up GILD calendars when the implied volatility was in the high 20’s. It’s now in the mid 30’s — so a good part of our gains were from vega.

[Author]

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