Updated: Feb 11
In a previous post from last Aug, I explained why buying OTM options for a few months period, might be a clever thing to do from a R:R perspective, if you can find relative cheap (underpriced) options.
In November, after the first jump in the markets, when the Vaccine announcements were out, I scanned the markets for cheap Calls for a few months period.
I then found EWT (Ishares MSCI Taiwan etf) that was trading around 50, and had Call55 to Mar21 that you could buy for 0.3$.
I liked how the chart was looking, and there was no doubt that it was a relative strength leader.
Also, I watch an interview on RealVision where the macro analyst suggested that Taiwan economy is very strong going out of the pandemic.
Add to that the fact that they almost didn't have any sick people for months, I decided that the EWT etf has a good probability to make more than 10% in the next 3.5 months.
The important point is to give it enough time, for this asymmetric R:R play to fulfil its potential.
So by risking 3000$ I could buy the right to own 550,000$ of the EWT at 55$ until the Mar expiration. Not a bad bet if it could get there in time. In my opinion, the probabilities for that together with the Calls market price that were undervalued, was an interesting position to take .
Fast forward 1.5 month later, EWT reached 55$, which gives me the upside like owning 550K in the EWT, while my initial risk was only 3K. And I still have more than 2 months to go...
Never underestimate the Right Tail too....
And don't sell calls like that, even if you own the underlying asset, because the premium is just too small for giving away your upside.
Jan 14th update:
The strong move continues. 12R profit and counting.
Sold 2500 EWT to take initial risk out and lock in some gains (1.5R). Now can profit also under 55 where the Call will be worthless and I will still be short 2500 EWT.
But the strong move up suggest the the probabilities are in favor of continuation upwards.
Let it run with 75% of the exposure.
Feb 11th update:
Switched from short ETFs to 25 Put60
And as it continued up, locked in gains with Feb 58 puts:
Lock-in gains & Let it Run ...