Low Risk Earnings Play: Bought MA 495/505 Call Diagonal

5/3/12
Sold one of the spreads the same day on Tues to break even and let the other two run.

Well, MA beat but still sold off.  As expected, the weekly calls are practically worthless and I can sell the long calls for ~$0.15.  Since I've already broken even on the trade by selling one back early, I'm willing to let a few more days pass and see what happens.  Stock could rebound strongly and I could get a few extra bucks.  Still 11 trading days so anything could happen.

Bought back the short calls so that I can use the required margin elsewhere.

Trade:
Bought MA May(w) 495 calls for $0.03


5/1/12
Mastercard (MA) reports earnings prior to the market opening tomorrow (5/2).  In anticipation of it beating expectations I opened a call diagonal. Options are pricing in approximately a 26-point move.  This is based on the current price of the ATM straddle (buying the ATM put & ATM call).  26 points is roughly a 5.6% move with the stock at 465.

If the stock misses and drops tomorrow, the premium received for selling the weekly call will cover the majority of what I paid for the monthly call.  Since this is a net debit trade my max loss is the $0.15 paid per spread.


Ideally, the stock gaps up, but stays below the 495 short strike so that I keep all of the $3.32 received, but my long calls appreciate in value too.

From the IV crush alone, even with no price movement, the weekly short call should lose value more quickly than the monthly long call.  If the short calls expire worthless, the long calls only need to retain $0.15 in value (the net debit) and the trade breaks even.

A simple, low risk way to play earnings directionally.

Trade:
Bought MA May 12 505 calls for $3.47
Sold MA 4 May(w) 12 495 calls for $3.32
Net debit = ($3.47 - $3.32) x 100 x 3 spreads = $45 paid