Options Trading Experiment: Buying Calls on Rising Stocks


For what has only happened the 42nd time in 2017 thus far, Emini Nasdaq 100 futures and Emini S&P 500 futures reached another all-time high this week. It’s the perfect time to test out a new quantitative options trading strategy that I’ve been mulling over for a while.

The premise is simple, buy at-the-money call options on stocks that have reached a new year-to-date high with 10-24 days until expiration. 

Just as a general disclaimer, please don’t mimic this strategy. It’s unlikely that anything exciting will occur, and there is a decent probability that I will lose all of the $500 that spent in options premium. We will follow up with an article sometime next week with an update on the positions, but just a warning, it might be a very brief article if every position is a loss…Hopefully, that won’t happen.

Background: Markets are Rising, Buy Stocks?

As the old saying goes, “everybody’s a genius in a bull market.”

At The Options Bro, we are always contemplating new methods to get long the market with a favorable loss-to-gain ratios. Because we prefer to use less capital whenever possible, instead of buying shares of stocks that have reached new YTD highs, we are purchasing 1 or 2 at-the-money call options to create either 50 long deltas or 100 long deltas. Effectively, it’s the same thing as buying 50 or 100 shares of stock, except there is an added time component that we have to get right.

A long stock position of 100 shares has a delta of 100. All of the options I just purchased expire anywhere between 10 and 24 days.

As discussed in the long call option strategy, if these stocks are not above the strike price of the long call by at least the total value of the long call premium, the calls will be worthless. Having said that, because these calls are at-the-money, there is a better probability of profit than buying far out-of-the-money calls. In the world of options trading, at-the-money, just means the strike price the option is the same or very close to the current value of the underlying asset.

The Strategy

I filtered my watchlist on TradeStation’s free platform to only show stocks that have reached a new year-to-date high. There is no particular reason for this, it’s just what I’ve been wanting to try for a while now. Obviously, since the markets are rising, buying calls sort of makes sense, but this is not the premise of this particular strategy. I could have selected to buy calls on 5 different stocks that have new CEOs, or have a low P/E ratio. The new YTD high is merely another technical indicator.

The Underlying Stocks

DOW $66.85 – Dow Chemical Company

HDB $94,86 – HDFC Bank Limited

PGR $46.91 – Progressive Corp

TSO $97.80- Tesoro Corp

XYL $57.21 – Xylem Inc

The Call Options

2 DOW 67 Calls for $0.60 each – 10 days until expiration

1 HDB  95 Call for $1.55  – 24 days until expiration

2 PGR 47 Calls for $0.64 each – 24 days until expiration 

1 TSO 99 Call for $0.89 – 10 days until expiration

2 XYL 60 Calls for  $0.45 each – 24 days until expiration

Account Screenshot

Buying call options.


Individual options prices

The Results

Check back in next week to see how the positions are doing. If any position nets 100% or more, it will be closed out. If these stocks keep climbing and make new YTD highs, the positions will increase in value. If not, the full $500 in premium will likely be lost, but I’m willing to take the risk. Buying 50 or 100 shares of these respective stocks would use approximately $25,000 in buying power without margin. With standard margin, the requirement is around 50%, so $12,500, but it would incur interest charges for the margin loan.

If this strategy yields an overall profit, we will compare the ROI of buying shares of the stock vs options on the stock.

As for commissions on trades like this, it’s always important to keep costs as low as possible. For a $1.00 per contract rate on this trade, the total cost is $8 for commissions. For brokers with the rate of something like $6.95 + 0.75, the total cost would be $12.95. It’s senseless to overpay for commissions.

The YTD profit for this particular account is visible in the bottom right of the screenshot; it has done okay this year, but it’s a high-risk only account.

The account has a total profit of $35,000 for the year, and $3,000 worth of free capital, so this option strategy is a perfect fit.

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