Short Term Strategy By Owning Calls

We briefly introduced factors which influence the price of an option, such as delta, gamma, vega and theta. The value of a delta can be qualified as the correlation of the option and its underlying stock. If a stock goes up $1, and a call goes up 80c, and a put goes down 30c, delta of that call is 0.80 and delta of that put is -0.3.  The deeper the strike price goes into the money, the higher the correlation, approaching 1 for call and -1 for put. Thus delta of a call is between 0 and 1 and delta of a put is between -1 and 0.

It is generally believe that the market will remain bullish in the next couple of years, most stocks will follow the trend and go up. Thus, I would like to discuss the riskiest short term call “strategy” first.

Short Term (less than 2 weeks) – Bet Earning Report with Deep Out of The Money Calls

If you are right about the market response to an earning report, you may achieve 100 fold or higher reward. Today is July 24, 2014. Visa will release its Q3 2014 earning report after market close. Current price of V is $223 and its Deep Out Of the Money (DOTM)call option,  V Jul25′ 235 Call has bid/ask of 0.13/0.20, delta is 0.05,with unlimited reward and limited risk, that is $13 (use bid price) per contract. If V goes up to $224, the call will goes up 1 delta ($0.05), that is $0.18.

V Jul25 14 235 Call

IF Visa’s ER greatly exceeded the expectation and its share price went up 10%, that is $245. Congratulations! You will instantly achieve 100 fold ROI , that is, a single contract will worth approximately $1000  (intrinsic value is already $245- $235 = $1,  $10 X 100 = $1000). That sounds great, huh? However, what if its ER is great but market response is little bit lukewarm and V ONLY appreciated 5.5% to $235 by 4PM ET July 25 2014? I am sorry, all of the call became worthless.

Here is a breakdown analysis of Greeks and I just assign an subjective probability value for simplicity:

delta: Let’s just assume you are a stock guru, we have inside information, ER is fantastic and market responds positively (ER beat does not necessarily guarantee a positive market response). The probability of a winning delta is 75%.

gamma: The movement  (of either direction) can be accelerated or decelerated, P = 50%.

vega: After earning report is released, the uncertainty diminished quickly, which will cause the collapse of vega and the depress the option price. P = 10%.

theta: Very negative when it is close to expiration day. Since it is Deep Out of The Money (DOTM), the chance of the underlaying climb to the strike are quite slim. P = 20%.

Overall, the probability of profit based on my subjective probability is 0.75%. Actually, OptionHouse provides a probability calculator. The probability to reach the break even ($235.13) is 10%, and the probability to achieve 100 fold ROI is 0.5%. How is that? The probability is approximately the same as  8 heads in a row!

V Probability

Take-home messages:

1. Low probability, high ROI, limited loss with unlimited potential.

2. No time for followup actions: V Jul25′ 235 Call的bid/ask spread is 50%,  it will expire tomorrow (July 25, 2014). It is too costly and has no time to take sensible followup actions.

3. Non-replicable: It seems easy to bet correctly once, but it is impossible to bet correctly consistently.  Have you seen anyone who won lottery more than once?

4. Non-scalable: It is impossible to acquire large amount of these kind of DOTM calls. The maximum is $6760 for 338 V Jul25′ 235 Calls. When market makers (MM) see someone is accumulating, they will ruthlessly skyrocket the call price, this will definitely cut into your ROI.

Giving the extremely low P and high ROI,  shall we play it? Personally I redeem it more like lottery. We all buy lottery, but the goal of buying lottery is entertainment, not investment or winning a large lump sum. We won’t using our down payment to purchase lottery tickets or this kind of DOTM calls.  The DOTM call strategy can be served as a way of entertainment. With $13 a pop and an unlimited dream, it is not a bad game to play.

P.S: At 4:30 PM ET, V released better than expected earning report,but stock plummeted. It is very like the V Jul25′ 235 Call will expire worthlessly.







上次的期权风险初探从趋势上讨论了影响option价格的一些因素如方向(delta), 加速度(gamma),振幅(vega)和时间(theta)等。我们在这里先量化delta: 它是指股价变化对期权价格的影响。如果股票上涨$1, 某个Call 上涨80c,则该Call的delta为0.80, 某个Put 下跌30c,则该Put的delta为-0.30。delta实际上是测量了期权价格和股票价格的关联度,call的delta在0和1之间,而put的delta在-1和0之间。


短期(2周以内)- 利用Deep Out of the Money Call 博ER

如果能赌对Earning Report的方向, 在很短时间会有高达上百倍的回报。Visa 会在今日收盘后公布2014年第三季度财报。V现价为$223,它的Deep Out Of the Money (DOTM)call option,  V Jul25′ 235 Call,现价为0.13, delta为0.05,可能的获利没有上限,损失有限,即每个合约$13。 也就是说如果V马上上涨至$224,该call将升至$0.18。

V Jul25 14 235 Call

如果盘后公布的财报远超预期,V上涨至$245 (+10%),恭喜!您得到了100倍回报,即每份合约$1000。听起来不错。不过如果盘后公布的财报虽然远超预期,但V到July 25收盘时只上涨至$235.00 (+5.5%),对不起,这些Call将为一文不值。大概分析一下Greeks:

delta: 假定我们是神算,有内幕,有大牛指点,ER果然beat,市场反应正面 (beat不一定涨,你懂的),胜率 75%。

gamma: 加速减速各半,胜率 50%。

vega: 财报公布后, 不确定性大减,一般vega会暴跌,胜率 10%。

theta: 非常负面,先假定在到期前能爬到in the money 的可能性为 20%。

粗略算下来的盈利的概率为0.75%。通过概率计算表格算出到$235,也就是break even的可能性为10%,而100倍盈利或以上的可能性为0.5%。这与连续投掷8次硬币,每次都是HEAD的概率相当。

V Probability


1. 低概率,高回报,损失有限,每单只要13刀,但盈利无上限。

2. 无法补救: V Jul25′ 235 Call的bid/ask spread 高达50%, 过一天就要到期, 来不及设法补救。

3. 不可重复: 猜中一次似乎不难,难的是反复猜中!见过老中lottery的吗?

4. 不可规模化:您不可能以同样的低价格购买到大量的 DOTM call。 您最大只能用 $6760 买到338 个 V Jul25′ 235 Call。当MM看到有人大量购入时,会豪不留情的抬高价格,不可能让您有那么高的回报。

Probability这么低,ROI这么高,该玩还是不玩?这是不是和我们都“玩”的Lottery有点像?只是我们玩Lottery的目的是娱乐,而不是盈利,也不会把down payment拿去全买了彩票。因此我们赌ER时,也要有娱乐精神,胜固可喜(记得回来发包子),败亦欣然,权当怡情花费,买彩票了。

后记: Visa 财报超出预期,但股票大跌, V Jul25′ 235 Call会expire worthlessly.






A Primer For Option Risk

Understand Option Trade

The higher the risk (or the lower the probability) , the higher the Return on Investment (ROI) and vice versa. We should reject any trade setup which associates with low probability and low ROI. In earning report (ER) season or a volatile market, deep Out-of-Money (OTM) options can be instantly doubled, tripled or zoomed to ten folds or higher.  However, it is extremely difficult for retail investors to profit from this kind of opportunities, or repetitively profit from those opportunities (It is a different story if you have insider information). On the contrary, Market Makers (MM) are more than happy to add extra amount of volatility premium on the option price to hedge their risks.

Some brokerage firms may provide the following information for options and option combos:  Profit Probability, Max Return, Chance of Max Return, Max Loss, Change of Max Loss。It looks like this:

SPXW price

SPX JUL25 ‘14 1975 CALL has unlimited profit potential, or grow N (N>1) folds. Of course, the bigger the N, the lower the probability.   Actually, at the current volatility level (VIX), the probability of double this call option is 15.86%. The distribution of probability looks like this:

SPXW probability

We will discuss the algorithm to calculate probability later . However, never put all your money in a position which Max Loss is 100% and Chance of Max Loss > 0%. There is 46% chance that this SPX JUL25 ‘14 1975 CALL may worth nothing at the expiration. If you put all your money in this position, you may be luck to make big money, but some unexpected events can easily wipe out all the positions.

Option Risk

Someone might experience and be upset when stock goes up sharply, but its call option changes a little or stays the same.  Here is an introduction to the factors which influence the price of an option. It is based upon owning a call option and expect the stock to appreciate.

1. Direction (delta)

If you pick the wrong direction, it is almost impossible to make a profit. Similar to owning a stock, if a stock goes down, it is very likely its underline calls goes down as well.

2.  Gamma

Even if you pick the right direction, but the stock goes up slowly. You can hold stock as long as it remains bullish, but you cannot hold a call like that. Although stock goes north, but it  has not surpassed the strike price and your OTM call becomes a ITM on the expiration day. I am sorry, your calls expires worthlessly.

3. Volatility (vega)

Suppose you bought a stock used to be a very volatile stock, goes up and down 3-5% percent daily, but become much less volatile recently.   That will adversely influence the call option. The higher the vega, the higher the premium on the option. Vega usually collapses after earning report is published when uncertainty is diminishing rapidly. That is the reason that you may bet the ER right but did make much from it.

4. Time (theta)

Time is the only factor which goes one way – down down down! A stock can go up or down, can accelerate or decelerate, can become more volatile or  less volatile. Time can only decay the option value! On the expiration day, theta is extremely negative for the near the money options. Vega and gamma simply run out of time to influence the option price.

5. Split & Dividend

Uneven stock splits,  such as GOOG split into GOOG and GOOGL, might add uncertainties to the option price. It is generally advised to avoid holding the option during this kind of stock splits. Dividend might greatly influence the call price of the value of dividend dwarfs the vega. In that case, you should exercise or sell the call to avoid loss. For example, on December 6, 2012, COSTCO issued a special dividend of $7 (7.2% of the share price). The next day COST closed down $5.36.  Holding a COST call option at market close of December 5th 2012 can result in huge lost because of the sizable dividend.

6.  Liquidity Risk

There is much less option traders than stock traders. Thus, there is usually huge spread between bid and ask price. It can easily make a 10% loss if you buy a option and  decide to sell it shortly.


1. Investment is a Marathon, not a sprint.

2. Never all in a trade whose Max Loss is 100% and Chance of Max Loss > 0%.

3. To profit from owning an OTM call option,  you need to be on the right side of delta, gamma, vega and theta. You’d better avoid split and dividend.

Are you ready?






期待的回报越高,可能性越低,反之亦然。 概率(Probability)和投资回报率 (Return on Investment ROI)总是此消彼长,高回报需要冒高风险,太稳妥是赚不了大钱滴。Out of The Money (OTM)期权可以在瞬间带来几倍,甚至几十倍的回报。但这种小概率事件是普通投资者很难捕捉到,或很难反复捕捉到(有内幕另当别论)。想反, MM们看透了散户一口想吃成一个大胖子,在ER前豪赌一把的心理,肆无忌惮地抬高期权的价格,抵消了卖期权者的风险。关于ER再专文讨论。券商可能会提供 期权或期权组合的Profit Probability, Max Return, Chance of Max Return, Max Loss, Change of Max Loss。是这个样子滴:

SPXW price

这个SPX JUL25 ‘14 1975 CALL有可能上涨N倍,当然N越大,可能性越小。事实上以现在的VIX水平,估算此call上涨一倍的可能性是15.86%。概率分布如下:

SPXW probability

关于概率的算法以后在专文讨论。当您看到Max Loss是100%而且Chance of Max Loss大于0%时就要小心了,这是说如果all in,您有被外婆的可能。这个本周到期的 SPX JUL25 ‘14 1975 CALL有46%的可能一文不值!所以玩期权千万别all in Chance of Max Loss大于0%的position, 可能很幸运这周没外婆,下周没外婆,但碰到要911这样的突发事件想不见外婆都难!


童鞋们可能会碰到股票大幅上涨,Call仅微动或纹丝不动的情况。以下以Call为例简单介绍影响期权价格的因素。需要bet 对所有的因素都对了才能盈利!

1. 方向 (delta)


2. 加速度 (gamma)

方向选择正确,却碰到只了慢牛,股票可以慢慢滴hold,但Call等不起。到了Expiration date,如果OTM还没有超过strike,成为In the Money (ITM),对不起,call expire了。

3. 波动性 (vega)

如果原来股票上窜下跳,现在服服帖帖的,vega给期权带来的影响为负值。反之为正。一般ER之后vega都会暴跌,所以很多ER bet了,期权却涨幅不大。

4. 时间 (theta)

时间是唯一一个单方向的影响因子。股票可涨可跌,加速度可快可慢,振幅可高可低,但除非时光倒流,时间只会给期权减值!Expiration day当天,Near The Money 的期权theta都是超级negative, gamma和vega都难以影响期权的价格。

5. 拆股和分红 (Split & Dividend)

不对称拆股,如GOOG拆分为GOOG和GOOGL给期权带来的影响很难预测,尽量不碰为佳。分红会给期权带来很大影响。一般如果能没有足够的资金 exercise, 应该在除息日前一天(ex-dividend day)将 call 卖出。例如:2012年12月6日,COSTCO 发放了$7 (股价的7.2%)特别红利。除息日股票下跌$5.36,如果您没有在ex-dividend day当天或之前卖出,将蒙受巨大损失。

6.  流动性风险 (Liquidity Risk)

期权的玩家远远少于股票的玩家。以此,绝大多数期权都有相当大的ask/bid spread。一买一卖就有可能造成10%以上的损失。


1. 投资是马拉松,不是短跑

2. 永远不要all in MaxLoss 100%且Chance of Max Loss大于0%的position

3. 要bet 对delta, gamma, vega和theta你的OTM 期权才能赚钱,期间最好不拆股,不分红,只涨, 飞快地涨才有的赚