Mid Term Call Strategy – Near The Money Call

We briefly discussed the short term strategy which utilizes DOTM (Deep Out Of The Money) Call to bet earning report. The stock can go either direction to certain level. Nevertheless, there is a option strategy to make a profit: We might long calls to profit from sudden jump, long puts to profit from plummeting stocks, long strangles or straddles, short iron condors to profit from drastic movement in either direction, or you might bet against no drastic, but no movement or mild movement by longing iron condors or shorting strangles/straddle. However, you should remember no matter what kind of setup you decide to take, your counterpart, very likely a market maker (MM), has already place the bid based on their sophisticated algorithm which is in favor of themselves. At the end of day. I mean at the end of market close of expiration day, MMs are likely the ones who profit eventually.

In the previous discuss of short term strategy,  theta (time decay) is the archenemy of DOTM (deep out of the money) near expiration call owner and the stock must appreciate rapidly. Theta can be found to describe the negative impact of time (i.e decreasing time value) pass to option price for both calls and puts. If delta is -0.80 (delta is always negative unless we can rollback the clock), which means the option will be devalued by $0.80 if other factors remain the same. The diminishing of time value accelerates when there is only 2 weeks left and race to the climax on the expiration day. If you need more leeway to allow your stock of interest to appreciate, you can choose Near the Money (NTM) Call which has approximately 2 months to expire. By that way, we will have sufficient time to ride the tide, but also have followup strategies when the tide is against us.

Each person has his own standard to pick stocks. I personally prefer the self-invented “3M” system to increase the probability of success:

1)Momentum: The underlying stock just breaks up and is in a confirmed uptrend, which is supported by favorable technical indicators and fundamentals.

2) Multiple non-correlated evidences, such as:

  •  The stock is recommended by Investors Business Daily and/or  Barron’s, such as it is on IBD Top 50 or one of the sector leaders.
  •  Phenomenon observed by myself, such as long line when dinning at Chipotle Mexican Grill, more electric cars on streets or in parking lots, more handbags of a brand, a full house of customers in Nordstrom, huge new job listing of your neighboring company (which usually means a M&A event might be imminent)
  •  Outperforming sectors:such as new energy, biotech and internet stocks of last year.

3)Market: We expect market will remain stable or maintain the uptrend. However, if there is a significant correction, most stock will go down with the broad market, no matter how pretty your chart appears to be.

We can purchase a high value, liquidated stock with delta around 0.5 and expect a ROI of 3-5 folds.

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

delta: Let’s just assume we have a very nice pick and the uptrend will maintained. The probability of a winning delta is 80%.

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

vega: If only consider the price of the expiration day, vega is not relevant.

theta: The time decay of the 1st one and half months are still manageable. Let’s just assume it will devalue 30%, or 70% favorable.

Overall, we have probability of 28%, not bad if we can gain 5x ROI.

Take home messages:

1. relatively low probability (not terribly low as DOTM),relative high ROI (not as high as DOTM),limited loss.

2. Followup possible: If the stock appreciates but time is running out, we can roll forward. If the stock is skyrocketing, we can roll up and let the profit run.

3. replicable, but ROI is not guaranteed. If we are successful one out of three trades (100% loss in 2 trades), we are only break even when we get 300% ROI on the winning trade. However, the probability of higher ROI will go much lower.

4. Not scalable: Except for those high volume liquidated stocks, Market Makers won’t allow you to purchase a great deal of NTM calls. They will lift the ask price when you are buying.

In essence, we can optimize our approaches to make right picks by refine our technical analysis and fundamental analysis, we can reveal more irrelevant events to predict the direction of the underlaying stock. However, we do not have the capacity to control the market and avoid adverse impact of an unexpected events. Thus, a prudent investor should have a sound exit strategy in mind before he press the buy button. Good luck!


买Call中期策略- Near The Money Call

上次讨论了短期策略利用DOTM (Deep Out Of The Money) Call来赌 ER。当然赌earning report的各种各样的期货玩法。赌剧烈运动的可以bet大涨 (long call),大跌 (long put), 大涨或大跌 (long strangle/straddle 或 short iron codor), 也可以bet小幅波动  (short strangle/straddle 或 long iron condor)。请牢记无论选择那种玩法,您的对手(买方/卖方),Market Makers一定计算好了的赔率并设定了对他有利的价格,笑到最后的很可能是他们。

在短期策略中, theta (time decay) 对call持有者是个巨大的威胁,股票必需在很短的时间内快速上扬。这里theta用来表示时间对期权价格的影响。如果theta指为-0.80 (注意theta 只能是负值),这表明在股价和其它因素不变的情况下,第二天该期权的价格将下降80c。通常对有time premium 的call在最后两个星期,time value开始显著下降,到expiration day达到最低值并趋向0。如果您需要更多时间让股票增值,可以选择二个月左右的Near the Money (NTM) Call, 这样就有充分的时间ride the momentum, 如果风向不对,也有机会补救。


1)Momentum(动能): 股票正处于突破后的上升趋势中, 有良好的TA指标和基本面。

2) Multiple non-correlated evidences (多个互不关联的证据),如:

  • 大牛, Investors Business Daily 或 Barron’s 推荐, 如 stock on IBD Top 50 or section leader
  • 客观观察到的经济现象: 如CMG要排长队,LD最近爱到Nordstrom 扫货,街上和parking lot里某种牌子的电动车大增,隔壁某公司忽然大举扩张(通常是并购前兆)等。
  •  Outperforming sectors: 如去年的新能源,生物科技和互联网等

3)Market(大市走向):我们期望市场平稳或上扬,但如果出现较大幅度的调整, 股票往往会跟随大市向下, 再好的momentum可能也无济于事。

我们可以选择流动性较高, 股票价格较高(以后专文讨论),delta 0.5左右的call,预期获得3-5倍的回报。


delta: 假定该股票会保持趋势,继续上行,胜率 80%。

gamma: 加速减速各半,各 50%。

vega: 振幅可高可低,但如果只考虑到期日的情况,则与之无关。

theta: 前1个半月theta的影响较小, 假定 70%。初步算来盈利的可能性为28%


1. 较低概率,较高回报,损失有限, 但盈利无上限。

2. 可以有后续手段: 如果上涨但速度不够, 您可以Roll forward得到跟多的时间,如果快速上行,您可以roll up 获得更高的利润。

3. 可重复,但收益难以保证:假如买对3次,一次成功(33%)得到3倍的回报,其他2次亏光,ROI仍是0。如果成功的那次得到5倍的回报,则ROI为67%。

4. 不可规模化:除某些交易量巨大的股票外(如GOOGL),您也不可能以同样的低价格购买到大量的 NTM call。在您买进的同时,MM会逐步抬高call的价格。

总之,我们可以优化我们利用技术指标来判断动能的方法,可以找到更多不互相关联的证据来支持股票上涨的观点。但我们无法左右大盘的走向和突发事件的发生,投资者应该在买入时就有exit  strategy,有备无患。下文将分享我个人的经验和教训。

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.