Two Mid Term Near The Money Call Trade Lessons:TSLA & SYNA

We discussed utilize near the money (NTM) calls to ride the momentum of an ascending stock in the previous article.  Stocks which meet the ‘3M’ criteria might have better chances to outperform the market.

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.

I would like to use my own recent trade experience to help others get a better understanding of Near-The-Money calls.

 TESLA (TSLA)

The Parking Lot of Computer History Museum, Mount View, California

The Parking Lot of Computer History Museum, Mount View, California

My initial position was established in 2009 with an average cost of $22. At that time, I just relocated to Silicon Valley and spend most of my effort working on a startup I co-founded with my friends while keeping an eye on emerging opportunities. Without a mature methodology, I purchased some Tesla shares just because that 100% electric car seemed to be a cool idea for me. Tesla share price had been fluctuated up and down from 2009 to 2013 and Tesla (the car) and TSLA (the stock) had not gained a spot in the Hall of Fame yet. I did not pay much attention until 2013 when I overheard Elon Musk talking about his great venture of Tesla and SpaceX on NPR (National Public Radio) [1]. In the early Spring of 2013, I spotted more and more Tesla cars when I was walking to the park, when I was on traffic duty and when I was in a parking lot [2]. The following  picture was taken on in the parking lot of The Computer History Museum, Mount View, California. My friends in other states confirmed they observed the same phenomenon [3]. Indeed, Tesla is becoming a fashion among the riches [4]. Meanwhile, it has been confirmed Tesla bumped up its productivity by tracking VINs, but still could not match the escalating demand [5].

TSLA started its brilliant run at early 2013. It appreciated 40% and touched $55 in early May. Elon Musk joked about a historical break even quarter. So far Tesla met all requirements of the 3Ms; a confirmed uptrend, a favorable fundamentals, multiple non correlated evidences (endorsements from reputable media, VINs and increasing popularity) and a stable stock market. Since Tesla was going to release the earning report on May 10, 2013, TSLA stock became more volatile. High vega ballooned the call price. A call option which strike is $15 (23%) out of the money and expire 4 months later was asked for $3.30. It might be hard to tell whether the SEP 21 13 $70 Call was still near the money, but I still want sufficient time to ride the uptrend. Fortunately, the rest of the story  unfolded as expected and  TSLA had a tremendous run! Tesla stock gapped up after earning report on May 10, 2013. The robust uptrend easily lasted more than 2 month. I closed all positions with 500% reward. At TSLA SEP 21 13 $70 Call expiration day, share price is 181, a.k.a this call had an intrinsic value of $111, which is 33,600% higher. Someone must have an extremely strong nerve to hold it!

I felt pure lucky for this kind of play. The chance of picking a super bull from thousands of stock are thin. I believe luck is balanced somehow. You won’t be able to lucky for a long run! I mentioned that the first 2Ms,(momentum and multiple irrelevant evidences) are not sufficient to make a trade successful ,if market tanks,the Near The Money Call strategy is hard to be profitable although there might be thousands of evidences.

Sep 21 $70 Call Purchased on May 7th, 2 days before earning report.  TSLA reached $181 at the expiration day

Sep 21 $70 Call Purchased on May 7th, 2 days before earning report. TSLA reached $181 at the expiration day

SYNAPTICS is such a painful lesson I learned. SNAP was in confirmed uptrend since the beginning of the year of 2014. Synapitics is frequently featured on Investors Business Daily’s Top 50 and Sector Leaders. Both Technical Analysis and Fundamental Analysis suggested that the company are in good track to bump up its profit. Some friends of mine left their admirable positions and joined Synaptics, which means SYNA was expanding rapidly. It seemed to be a perfect setup since SYNA easily met all requirements. I purchased $SYNA 19 APR14 65.0 C call which is at the money (ATM) call and have 2 months to run. However, there was a market correction lasted 2 months, SYNA never touched the strike price again in the next 2 months! All of my SYNA calls expired worthlessly! I immediately deleted SYNA from my watch list. However, a few month later, SYNA touched a new high of $92! Actually, it wad in the money right after the cell expired!

SYNA was below $65 until my $65 calls expired. It then advanced to $90

SYNA was below $65 until my $65 calls expired. It then advanced to $90

The take message: It is much difficult to profit from call purchase since we should take strike price, expiration date and the momentum of the underlying stock. Time erosion is still a haunting threat to the call owner.  Sometimes you get tailwind, sometimes the wind turns against you.

Next time, I will introduce Deep In The Money Call to replace margin.

 

中期Near The Money Call 实例:TSLA和SYNA

前文讨论了利用Near The Money Call在股票维持上涨动能时盈利, 提到了自创的3M理论来pick,即 Momentum, Multiple non-correlated evidences 和 Market。

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。

以下是我个人经历,希望能帮助大家加深对期权的理解有所帮助。

TESLA (TSLA)-特斯拉

刚开始留意TSLA时是$22左右(后面没有0), 记得微博上关注的朋友吼了一嗓子,当时刚到硅谷,正在热血沸腾创业中,觉得电动车这个概念有点意思,就入了点,放在那里忙startup去了,结果一放就是N年,期间上上下下,都没有太在意。到了2013年,开车听收音机NPR刚好在谈Elon Musk的宏伟计划【1】,以前TESLA是稀罕之物,但此时硅谷的TESLA电动车越来越多,几乎每天都能看到好几辆【2】。这是我2013年某日在位于山景城的Computer History Museum的Parking Lot里拍摄到的。和别州的朋友,他说也观察到了同样的现象【3】。碰巧在微博中有位土豪朋友说他准备入一辆特斯拉电动车,感觉Tesla正在成为一种fashion【4】。我想车买不起,好歹买些Option,没准还能赚到一辆车呢!

The Parking Lot of Computer History Museum, Mount View, California

The Parking Lot of Computer History Museum, Mount View, California

当时买到车的人都把VIN 贴出来,可以看出Tesla产能大增,但仍供不应求【5】。

Tesla到2013年初即开始上涨,当时还没这么出名,到5月初上涨了40%到$55,当时Elon已经放出风来,Tesla会第一次实现break even。TSLA已基本满足了‘3M’的条件。知名媒体造势,TA, FA都不错,5个不相关的证据表明公司正在高速发展,整个股市也没有大的起伏。因为将在2013年5月10日公布财务报告。因为振幅巨大,二个月后到期的Option被炒得很高,但还是一咬牙以$3.30入了SEP 21 13 $70 Call,已经基本不算是Near The Money Call了,但我还是希望有更多的时间ride the uptrend。结果如我所愿,TSLA在5月10日ER后大涨,并在接下来的2个月内一直保持强大上涨动能,轻松翻倍。我在实现>5倍利润后了,逐步减仓出场。当时对call followup action还没有使用娴熟,否则roll up或roll forward都可获利更多。该合约到期时TSLA的股价为$181,即call的intrinsic value是$111,已上涨了33.6倍!可是谁又能hold住?

Sep 21 $70 Call Purchased on May 7th, 2 days before earning report.  TSLA reached $181 at the expiration day

Sep 21 $70 Call Purchased on May 7th, 2 days before earning report. TSLA reached $181 at the expiration day

仔细想来,在数千只股票中挑出大牛股纯属幸运。而命运是公平滴,你总得匀别人一点。我在前文也提到前面的2个M(momentum和multiple irrelevant evidences)只是必要条件,如果没有Market配合,有一千个靠(call)它的理由,如果市场在从购买期权到期权到期这段时间如果出现较大的调整,还是很难获利。

SYNAPTICS就是这么个惨痛滴血本乌龟的经历。今年开始SYNA一直不错,它家的股票也是IBD Top 50 和Sector Leaders 的常客,TA (Technical Analysis), FA (Fundamental Analysis)要多棒有多棒。更为严重的是,身边有几位曾在硅谷知名公司工作过的朋友跳槽到了Snaptics,表明该公司进入了新一轮高速发展期。(在上市公司密集的地方,只要注意观察,不需要提前看到财务报表,也可能发掘到很多机会,以后在专文讨论)Snaptics的确就是个机会,它轻松满足所有的条件,我“果断”以$4.30入了2个月到期的SYNA 19 APR14 65.0 C call(当日的股价为$65),。人算不如天算,在我入场后,大势开始了一轮长达2个月的调整, SYNA一直在strike price 之下,看着theta (time decay)一点 一点的蚕食,心里一直在纠结是否要追加投资roll forward。最后决定不追,由它去吧!到了expiration day, SNAP还是没到$65, 靠, 一文不值了! 我恶狠狠滴把SYNA的sticker从我的watch list 上删掉了!

SYNA was below $65 until my $65 calls expired. It then advanced to $90

SYNA was below $65 until my $65 calls expired. It then advanced to $90

谁知几个月之后,我无意中又看了SYNA一眼,发现在call到期的第二天就一跃in the money,而且几个月连续上涨到$90多!一天之差,我见了外婆!

总结:期权要考虑到股票,strike & expiration date,当然比纯买股票难很多!所以赌动能也不靠谱, time erosion 太可怕了!所以不中是应该的,中了是运气。懂Monte Carlo的童鞋请帮忙算算长期回报。

下回介绍用Deep In The Money Call取代margin的办法。

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!