The CPI report was “a little scary.” Inflation jumped, and Brian Overby notes the odds of a Fed rate hike at the October meeting moved from minimal to about 50/50, even ahead of the midterm elections. Jamie Dimon’s cautious comments on JPMorgan’s earnings added to the mood. The VIX is still fairly calm near 15.70, but Brian sees institutional put buying, especially in the Russell 2000 ETF (IWM), down 1.2%. Small caps are hit hardest by higher rates, and the QQQs and SPX are lower too. Most of the episode is about managing the Chevron (CVX) trade that has run through the series. It started about a month ago as a diagonal: a long call expiring October 30, the day Chevron reports before the open, chosen to benefit from rising implied volatility into earnings, plus a short-term call sold against it and rolled each week. The stock first fell, then climbed with oil, and is now near $220, above the short 215 strike. Brian shows three choices. First, close the whole spread. With implied volatility up and time value left on the long 210 call, the five-point spread is trading for about $6.50, more than its width. Against his cost basis of about $1.50 on the long call, that’s roughly tripling the money, so he closes his position and skips the earnings risk. Second, roll the short 215 call to the October 23 expiration for about a $1.45 credit, which still protects the trade if the stock pulls back to 215. Third, if you’re already in the October 23 short, buy it back and sell the October 30 217.50 call for about 60 cents, which gives the stock room to run into the report. His rule for rolling covered calls, cash-secured puts and diagonals: roll when the stock is within a point or two, or about 1%, of the strike. When it’s deep in the money, as Chevron is now, it’s often better to take the profit. He then checks Monday’s Goldman Sachs skip-strike call butterfly. It took in 50 cents and was safe unless the stock gapped far above the expected move. Goldman opened higher, then fell as Dimon spoke, and the position is now worth about zero, so it can be unwound “for even.” Brian explains a choice he didn’t fully cover on Monday: a 10-point-wide version would have been better. The extra distance to the 950 strike means its time value disappears faster if the stock rallies back, making it easier to hold through expiration. He also explains why he chose the call side for a bullish lean: put skew in the financials was too expensive before earnings, so short put spreads didn’t pay enough. Both earnings trades worked. He closes by looking ahead: Magnificent Seven earnings next week, the consumer, and the CME FedWatch tool. Fundamental Friday will cover volatility around earnings. Key takeaways: – Rising implied volatility before earnings can push a spread’s value above its width; consider taking the profit. – Roll short options when the stock is within about 1% of the strike, not when they’re deep in the money. – If put skew makes bullish put spreads too expensive, look at the call side. – Wider skip-strike butterflies give time decay more room to work. Options involve risk. This episode is educational and not a recommendation. |
