Delta Gains on a PCCRC

The same way it is not worthwhile to keep a PCCRC trade after a strong volume spike, it is a mistake to give up on a PCCRC before a volatility spike has occurred. Even when maximum Delta Gains (gains due to the strong move of a stock in either direction) seem to have occurred, Vega can still come in and procure additional profits. It is very likely that within a 5-6 month period, a volatility spike will occur, and you can have your gains.

My metaphore of the 3 horses moving the profit carriage (Vega, Delta and Theta) is exemplified here by this PCCRC on NVDA. As the stock price slowly drifted lower without a volatility spike, Delta carried the day. But, see for yourself. First, the trade was entered according to my rules described in a document entitled “PCCRC with high fliers” I wrote (please contact me by e-mail if you’d like a pdf copy).

Noticed how a volatility spike had occurred recently, but it seem as though it was going to start climbing again. Retrospectively, 45% is not a low volatility situation, and perhaps I should have waited a few days. It is always best to enter a trade under ideal conditions because there are opportunities always there. In the end, the trade would have never been entered because the volatility never went any lower. NVDA, however, was chosen because of the volatility spikes around earnings, which were only 2 months ahead. A build up in volatility does occur in advance of earnings, and NVDA has experience spikes of up to 70% IV.



Noticed how a volatility spike had occurred recently, but it seem as though it was going to start climbing again. Retrospectively, 45% is not a low volatility situation, and perhaps I should have waited a few days. It is always best to enter a trade under ideal conditions because there are opportunities always there. In the end, the trade would have never been entered because the volatility never went any lower. NVDA, however, was chosen because of the volatility spikes around earnings, which were only 2 months ahead. A build up in volatility does occur in advance of earnings, and NVDA has experience spikes of up to 70% IV.



Close to March expiration, the stock trading at almost $2 below strike price, there has been no volatility spike. I roll over my shorts, reducing the debit in the trade, although the profits are only marginal. Volatility is slowly, very slowly going higher. What good is it to reduce the debit? There is a bit of a risk reduction afforded by Theta (time value gains), but unless there is a strong Volatility spike and/or a Delta move, one is adding commissions to a bad trade. However, since earnings will occur before the long options expire, we are just protecting against time decay with the rollovers. However, you DO free a lot of capital that could be used in other similar trades. A reduction in the capital used, makes you annualized rate of return much better.



On or near April expiration, I once again roll over the shorts, and shortly thereafter I appeared that NVDA hit a bottom. Shortly thereafter, on April 20th, I had accumulated a good profit, most of it because of the move well below the strike price. The long puts have appreciated enough to compensate for the long calls and short puts. The IV had increased only mildly, without any big spikes, but I have the sense that volatility may begin to decline. This case is an good example of how the PCRCC can make a profit by virtue of its Delta Gains. I don't expect further move down, and I am happy with the reward. BUT the PCRCC has one more trick up its sleave. As you see below, I close the put portion of the trade, and leave the call portion. Why would I do that?




1. My profit of $2540 has been made mostly on the put side, which is equivalent to a Put Ratio Calendar.
2. The remaing capital in the trade is only $300. However, the potential gains are substantial. I leave the remaining portion of the trade as s "lotery ticket". I might get lucky.
3. If the stock continues to fall, I have no risk, other than about $300.

Here is the resulting risk graph:


Friday’s rally on NVDA proved me right (or lucky), and I have now accumulated further gains, and the enviable task of deciding if enough is enough, and “ring the register”, like Jim Cramer would say.