Chronos Square Capital

The first written reference suggesting ‘there’s more than one way to skin a cat’ dates to 1840. Regardless, it’s apropos to trading options. How to skin a cat (make a profit) with options;
1. we immediately think of a change in option value (delta), given an increase in the underlying. And, then, there are
2. Theta positive trades, where you get paid to wait. Our preferred structure, the BuCD, is typically constructed with higher time decay (theta) in the short than in the long. Decay (theta) is negative , right? So, theta on a short (a negative long if you will) is positive, creating income. But, a less visible friend at times and foe at others is,
3. Vega, or price responses to volatility. If you ever constructed an excel Black-Scholes option pricing model, you appreciate how incredibly elegant the BSOPM is AND, the impact of the variables. Volatility is a significant factor to option values, and a migration from a lower Vega state to a higher Vega environment (read that to mean war for example), can exert an impact.

BKNG - our Booking Holdings trade on Feb 9 is a wonderful example. Price action has been quite negative since early January, depressing BKNG RSI to a flashing green light level at 21.1, well below our Oscillator’s oversold trigger. It’s flopped around since, trying to regain positive momentum.

Okay, here’s the punchline to the story, then we will summarize the trade. BKNG was at $4,235 at the opening trade and after falling further, it rebounded to $4,253 when we closed the trade. That’s a paltry increase of .4%.

Long call delta .5669
Short call delta .3564
Trade net delta .2105
BKNG increased $18, so delta (and gamma) contributed about $3.90 of the $31.10/share gain in the trade.

LC theta -1.14
SC theta -(-2.13)
Net theta = .99, so for 24 days, about $23.76.

Theta and delta/gamma accounted for roughly $27.66 or 89% of the gain. In this trade, about 11% of the gain was due to a modest increase in volatility.

BKNG
Sep $4300 x March $4500 BuCD
24 day hold with a 9.18% HPR and a 146% annROI.

Moral of this story? Theta. Benefiting from time decay, and skinning the cat.

We’ve been a bit ‘trading quiet’ the past month plus. There were two trades we did and one we thought about, but didn’t.
AAPL - we traded
??? - still marinating
SLV - silver got so far out of whack and overbought, but we had just made a substantial (largest ever) trade on AAPL, and, we wanted to stay with bullish rather than bearish trades. We passed on a very high probability put trade. When a colleague bought SLV on 1/26, we advised it had breached our upside trigger and decline was imminent. It continued to go up, until it was done and then went down. Hard. We didn’t have a horse in the race, so we just watched the tumble.

AAPL - it’s a great stock to trade AND research for so many reasons. On 1/21, AAPL RSI fell under 18, a level it’s breached only five times in AAPL history, and well below the downside trigger isolated by our momentum oscillator. Selling pressure elevated Vega (volatility) along the curve, which boosted premiums. We decided to let the price stabilize and the vol curve to contract and trend toward contango. We liked the Greeks on the 26th and voila.

The trade - Jan 27 $250 x Mar 26 $270 BuCD.

A few trade metrics - probability of a profit (according to our trading platform) = 51.91%
Breakeven AAPL Price = $250.30
Price at trade inception = $244.98
Theta (net) = $.0355
Delta (net) = .3907
Our purchase premium = $29.70
Our MOMENTUM OSCILLATOR probability = 99.84% win.

What did we like about this trade?
Decent net delta and gamma
Theta positive. In fact, had AAPL not moved, the trade theta would have yielded 3.59% on our premium on a 30-day hold, which is not bad.

What might we have preferred?
Our long call was slightly OTM. Had we been ATM, we’d have had a juicier theta, BUT, there was no $245 strike in the chain.

How did it turn out?
Holding period return (HPR) = 16.82%
Holding period = 8 (1/26 - 2/3)
annROI = 767%