Dissecting a trade in Guidewire Software

I have an earnings trade on in $GWRE (noted here) and had received several questions/comments regarding what the trade is. So let me break it down. Here is the trade:

I am Short the Apr/Oct 50 Call Calendar and Short the Oct/Sep 45 Put Calendar

Here is the breakdown:

Short the Apr/Oct 50 Call Calendar =

  • I am Long the October 50 Calls (added post-earnings)
  • I am Short the April 2014 50 Calls (pre-earnings)

Short the Oct/Sep 45 Put Calendar =

  • I am Long the September 45 Puts
  • I am Short the October 45 Puts

So how does this trade work? Current price is at $44.70. Let’s look at some scenarios:

  1. If the stock goes up to $45 by September expiration. The September 45 Puts will expire (have little to no value). This will leave the short October 45 Puts (Bullish). The Call Calendar would still be on as the expiration is Oct/April & the remaining Option pieces would morph into a Risk Reversal Call Spread
  2. If the stock goes to $50 by September expiration. Whoa, what a move! I would likely take off (BtC) the short October 45 Puts (would be cheap). The September 45 Puts go poof. The Call Calendar would look great.
  3. If the stock price goes nowhere. Decay sets in on the appropriate Option pieces. I would get whatever value I can from the long September 45 Puts – if they are still in the money (ITM)
  4. If the stock is at $48 at September expiration. The September Puts would be worthless & the October 45 Puts would be OTM. Great. The Call Calendar would look good.

 

BtC = buy to close

OTM = Out of the Money