I'm a bit in the weeds from the topic, but comment: Re KISS --> Danger to assume simpler is always better. The longer winded without shortcuts acronym would be KIASASPBNS: Keep It As Simple As Possible But No Simpler. Much harder to do, but is iron-clad.
Synthetic leveraging using options
- Thread starter taotree
- Start date
The theory is your short one option must have double or more than double the extrinsic value of your 2 long options together. The delta placement of the long options will vary based on vol and dte.
Hi, I know I'm posting to an old thread, but I recently discovered ZEBRAs and was looking for more info on them when I found your post.
I'm all for mechanical trading like you backtested, but have come to think that's a Holy Grail and may never work. Would you expect to outright buy and sell SPY every so often and have it beat just holding SPY?
Because the ZEBRA is really a stock-replacement strategy, so that's what your backtests were really doing, and the underperformance might've been due to fees or the little bit of theta still left in the setup.
But try one as a leveraged play on something you're bullish on and I think you'll see the beauty of them: same 1:1 appreciation as stock, much smaller capital invested, so RoC is much higher, and almost no time decay. Then sell CCs against the position for even more return.
Cheers!
I'm all for mechanical trading like you backtested, but have come to think that's a Holy Grail and may never work. Would you expect to outright buy and sell SPY every so often and have it beat just holding SPY?
Because the ZEBRA is really a stock-replacement strategy, so that's what your backtests were really doing, and the underperformance might've been due to fees or the little bit of theta still left in the setup.
But try one as a leveraged play on something you're bullish on and I think you'll see the beauty of them: same 1:1 appreciation as stock, much smaller capital invested, so RoC is much higher, and almost no time decay. Then sell CCs against the position for even more return.
Cheers!
OK so if we look at BITX trading @ 28.45
With an expected move is $3 to 31.45 by Jul10 you would gain $2.55 per share.
600 shares = $1530
Capital = $17,070
(Jun12 expiry)
Buying calls
6 31 calls
Cost = -$720
Profits = -$60
Result: Dumpster fire
Buying calls
6 28 calls
Cost = -$960
Profits = $1002.75
Buying calls
3 28 calls
Cost = -$480
Profits = $501.37
Zebra
6 28 calls 28
-3 29 calls 29
Cost = -$645
Profits = $588.41
Conclusion buying short term otm calls or strangles is garbage...and no real benefit doing the zebra over just buying atm calls.
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Hi,
I'm trying to follow your numbers but having some difficulty.
Were you talking about July 12th expiration? Because you said July 10th and then June 12th.
And why not do 100 shares, or 1 contract, to keep the math easier?
And I wouldn't go long BITX at all because it's trending down over the last 1 month for sure, and arguably since March.
And I don't think you set the ZEBRA up right.
But how about ARM? It's up nicely since mid-April, and closed Friday at 181.19.
I'll stick to a week out, since I think that's what you started with. Expected Move on ThinkOrSwim (now owned by Schwab) for 12July is $14.40.
Buy 100 shares, costs $18,119.
If you make $14.40 per share that's $1,440.
Divide to get +7.9% rate-of-return/return-on-capital/return-on-investment/whatever you want to call it. But it's important to look at the percentage rate, and not just the dollars.
Now set up a ZEBRA that expires 12July (I wouldn't do this, too short, but):
Buy (2) of the 172.5 Calls at 71 delta.
Sell the ATM 182.5 Call at 49 delta.
Add the deltas: 71 + 71 - 49 = 93 deltas in the position
Check the extrinsic value of the position:
This is the beauty of the ZEBRA, it doesn't decay much with time.
Extrinsic value in the long Calls:
Midpoint of 11.80 + Strike of 172.5 = 184.30
Subtract spot: 184.30 - 181.19 = 3.11
Multiply that by 2, and I've bought $6.22 of extrinsic value.
The short 182.5C has a Midpoint of 6.25, and that's all extrinsic that I've sold.
So the position is essentially theta-neutral, like the stock.
That 172.5/182.5 ZEBRA costs:
(2 x 11.80) - 6.25 = $17.35
Now let that position gain $14.40 by expiration in 5 days and your return is:
(0.93 x 14.40) / 17.35 = 77%
Let's do an ATM Call
We'd buy the same 182.5C we sold above, for $6.25.
Let ARM increase by 14.40 again, so it's 195.59 at the close Friday.
The 182.5C is worth (195.59 - 182.50) = 13.09
RoR: 13.09 / 6.25 = 209%
So of course the ATM Call wins that race, but that's hardly the whole picture, is it?
The Breakeven on that ATM Call was (182.5 + 6.25 ) = 188.75.
So let ARM only go to 188.50 and what happens?
The ATM Call loses 100%.
But the ZEBRA still makes about 39%.
Or let ARM not move at all: the ATM Call still loses 100%, but the ZEBRA loses essentially zero due its "zero extrensic" nature.
Anyway, the ZEBRA is a stock-replacement strategy, nothing more.
Put on a synthetic long if you want (buy an ATM Call, sell an ATM Put), but those options will still time-decay.
Or buy a deeper ITM Call to maximize delta, and farther out in time to minimizer per-day theta decay, but it'll still decay with time. And it'll cost more.
The ZEBRA is so beautiful because it's about 100-delta so it mimics stock, and it's approximately theta-neutral ("zero extrinsic"), also mimicking stock.
Set one up 4 to 6 weeks out and see how it behaves. On ARM the Buying Power Reduction will be about 20-25%% of buying the stock, giving you at least 4x leverage.
And then sell a CC against it however you normally do with stock. That gives you a nice return even if the underlying doesn't move.
Take care.
I'm trying to follow your numbers but having some difficulty.
Were you talking about July 12th expiration? Because you said July 10th and then June 12th.
And why not do 100 shares, or 1 contract, to keep the math easier?
And I wouldn't go long BITX at all because it's trending down over the last 1 month for sure, and arguably since March.
And I don't think you set the ZEBRA up right.
But how about ARM? It's up nicely since mid-April, and closed Friday at 181.19.
I'll stick to a week out, since I think that's what you started with. Expected Move on ThinkOrSwim (now owned by Schwab) for 12July is $14.40.
Buy 100 shares, costs $18,119.
If you make $14.40 per share that's $1,440.
Divide to get +7.9% rate-of-return/return-on-capital/return-on-investment/whatever you want to call it. But it's important to look at the percentage rate, and not just the dollars.
Now set up a ZEBRA that expires 12July (I wouldn't do this, too short, but):
Buy (2) of the 172.5 Calls at 71 delta.
Sell the ATM 182.5 Call at 49 delta.
Add the deltas: 71 + 71 - 49 = 93 deltas in the position
Check the extrinsic value of the position:
This is the beauty of the ZEBRA, it doesn't decay much with time.
Extrinsic value in the long Calls:
Midpoint of 11.80 + Strike of 172.5 = 184.30
Subtract spot: 184.30 - 181.19 = 3.11
Multiply that by 2, and I've bought $6.22 of extrinsic value.
The short 182.5C has a Midpoint of 6.25, and that's all extrinsic that I've sold.
So the position is essentially theta-neutral, like the stock.
That 172.5/182.5 ZEBRA costs:
(2 x 11.80) - 6.25 = $17.35
Now let that position gain $14.40 by expiration in 5 days and your return is:
(0.93 x 14.40) / 17.35 = 77%
Let's do an ATM Call
We'd buy the same 182.5C we sold above, for $6.25.
Let ARM increase by 14.40 again, so it's 195.59 at the close Friday.
The 182.5C is worth (195.59 - 182.50) = 13.09
RoR: 13.09 / 6.25 = 209%
So of course the ATM Call wins that race, but that's hardly the whole picture, is it?
The Breakeven on that ATM Call was (182.5 + 6.25 ) = 188.75.
So let ARM only go to 188.50 and what happens?
The ATM Call loses 100%.
But the ZEBRA still makes about 39%.
Or let ARM not move at all: the ATM Call still loses 100%, but the ZEBRA loses essentially zero due its "zero extrensic" nature.
Anyway, the ZEBRA is a stock-replacement strategy, nothing more.
Put on a synthetic long if you want (buy an ATM Call, sell an ATM Put), but those options will still time-decay.
Or buy a deeper ITM Call to maximize delta, and farther out in time to minimizer per-day theta decay, but it'll still decay with time. And it'll cost more.
The ZEBRA is so beautiful because it's about 100-delta so it mimics stock, and it's approximately theta-neutral ("zero extrinsic"), also mimicking stock.
Set one up 4 to 6 weeks out and see how it behaves. On ARM the Buying Power Reduction will be about 20-25%% of buying the stock, giving you at least 4x leverage.
And then sell a CC against it however you normally do with stock. That gives you a nice return even if the underlying doesn't move.
Take care.
Hey I just figured out how to use the truncated quote feature!
Sry that was a typo. July 10 was the date I was getting the forecast for, July12 was the expiry. What deltas are the calls at typically?
AND this is when you want to go long because calls are cheap lol. I am quite aware of how btc is trending as I called 58k 3 months ago.
Here.
https://www.elitetrader.com/et/attachments/upload_2024-4-18_14-4-25-png.338493/
I guess the classic ZEBRA is to go long 2 Calls at 75 delta, and short the one ATM, ostensibly 50 delta. So 75 + 75 - 50 leaves 100 deltas.
Though I often see it as "buy 2 70's and sell 1 50." But I don't understand that because it adds up to only 90 deltas for the position.
But I think the important thing is to cancel out the extrinsic values, so buy the Calls that have extrinsic value equal to about half of the ATM Call. For TSM 6 weeks out (the Aug monthly):
You probably know how to calculate the Extrinsic value in the 170 Calls, but find the Midpoint (19.48), add it to the Strike of 170 to get 189.48, then subtract the stock price of 183.99 to leave 5.49 Extrinsic in each 170C.
Since we're buying 2, double that to 10.98.
Then sell the ATM 185C for Midpoint of 10.72.
And look, the Extrinsic values almost cancel out: buying 10.98 and selling 10.72
And the Deltas are 75 + 75 - 54 = 96, pretty close to 100.
Then plot it in OptionStrat or similar, and this is what they look like:
If you've done it right you'll always get that shape:
Breakeven right at spot.
1:1 on the upside.
2:1 on the downside.
But Max Loss capped at what you paid for it.
It cost you 28.23, so you're getting 6.5x leverage to the stock, but participating 1-for-1 with upside moves. (And yes, 2-for-1 on downside moves.)
And the cost here is 15% of spot, so if you do nothing at all to manage losses, it's like having a 15% stop-loss on shares.
And no time decay! (Or very little.)
Then go sell a weekly Call against it, say the 12Jul190C at 31-delta for 1.90, and that's an RoR of 1.9/28.23 = 6.7%.
In the last week (or the week before), sell the spread for its (hopefully) appreciated value and put another one on. You can go longer or shorter, paying more or less accordingly, and getting less or more leverage. I'm liking 30-45 days.
Play around with them, I think you'll like them.
But remember that they're a stock-replacement strategy, not a speculative long Call like you might favor, so the use-case is different. I buy them specifically to sell CCs against, and I buy into strength.
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OK I'm going to play around with it. I think on tos you can show intrinsic and extrinsic values under columns settings.
Ok using BITX (28.46) you can see my delta is .95 (.72+.72-.49)
1SD is about 32.18 so I would pnl $2800.
With 2000 shares I would profit 32.18-28.46 = $7440.
I have the break even at $29.50, and the cost to put the position on at -$6850...if price doesn't move to $29.50 then I'm out -$6850, so I don't see where there is no theta risk?
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Mindset.
This is a stock-replacement strategy, that's all. That's why you'd only want to use it on stocks that are trending up.
And if you've set it up right, the BE should be right at spot.
The deltas get you close, but you really need to make sure the Extrinsic you're buying in the 2 long Calls is offset by the Extrinsic you sell in the short Call.
This is a stock-replacement strategy, that's all. That's why you'd only want to use it on stocks that are trending up.
And if you've set it up right, the BE should be right at spot.
The deltas get you close, but you really need to make sure the Extrinsic you're buying in the 2 long Calls is offset by the Extrinsic you sell in the short Call.