Benefitting from volatility skew around an earnings event.
Weatherford Intl. reports after the bell today ( 7/23). We noticed good volatility skew between the AUG1 and AUG options, so we are trying to grab a few bucks with a double calendar. Calendars are one of our favorite ways to play earnings. With this strategy you benefit from the post-earnings volatility collapse. You're looking for higher implied volatility in the front month ( short strikes) compared to the back month ( long strikes). The skew between the two is where your potential profits come from, when vol. collapses it will hit the front month harder than the back month.
We do have a bullish bias for WFT based on a Bullish PowerGauge rating, strong relative strength and pretty strong recent accumulation. That said, this particular strategy is about benefitting from volatility skew not necessarily betting on direction.
Here's the trade we put on ahead of WFT's earnings after the bell.