Chronos Square Capital

It’s easy to look back and say ‘what if’ or ‘if only’, right?
Our trading models identify entry points, opportunities to buy or sell. The other critical decisions are human decisions, based on a set of disciplines. Which decisions you ask?
Exit of course. When to sell is quite important too. Pigs get fat, hogs get slaughtered.
Very critically, the trade itself. In most situations, there are a seemingly infinite set of trade options on which to capitalize a BUY or SELL trigger. Trades can range from the most vanilla, a long equity, through long options and simple spreads, to more esoteric option combination trades.

We very recently closed a nice little trade on NVS, Novartis. (Actually, not so little…). Pharma companies typically exhibit elegant volatility, ideal for our decision models. On extreme pressure, the Buy trigger on NVS was breached on October 29. We held our trade of choice for thirteen days.
Let’s consider our trade vs. three alternatives.
1. Our trade - Jan 27 $120 x Dec $130 LEAP BuCD. Our 13 day hold generated a 15.46% HPR, for annROI of 434%. Solid W right?
2. What would a long equity trade have returned? Buying NVS would have kicked out a 7.14% HPR for an annROI of 201%. Still a nice win, but it displays the leverage embedded in options.
3. A long LEAP BuC, no short call, just a long, long call. While this trade would be theta negative and elevates the breakeven point, delta and gamma juice the return on a price bounce, generating a hypothetical HPR of 33.80% and a 949% annROI.
4. Finally, a more aggressive approach with a shorter expiration long call, maybe we go with the Dec $130 for poetry, symmetry and simplicity? A Dec $130 long call generated a potent 286.7% thirteen day HPR and a whopping 8,049% annROI!

Synopsis - our trade of choice for NVS carried more leverage than a straight long on the underlying, but was theta positive, so we were paid to wait. The short also lowered our breakeven.
Our short call cut the upside on the trade by more than 50%, which is meaningful.
Finally, a shorter expiration long call? Theta works against us quickly, so the price movement is essential. Importantly, time becomes critical. When you are out of time, you’re out of options.

Conclusion - We will continue a trading discipline primarily premised on LEAP BuCDs in response to oversold triggers. But, that 8,000+% annROI is … tempting.