PCCRC Strategy Summary

In August 2009 I begin trading my current option strategy which is called the PCCRC. This strategy was popularized by Juan Sarmiento at OptionsVet.com. The strategy looks to set up a ratio calendar trade on stocks that have reported earnings recently and have jumped >10%. This is a low risk strategy that benefits from 3 factors that affect options positions.

First it benefits from volatility rising (Vega). Generally implied volatility peaks just before an earnings announcement, then falls dramatically, then slowly rises over the next 3 months until the next earnings release. I want to get into the trade right after earnings when implied volatility has spiked lower, and hopefully make some profits as volatility rises in the weeks ahead.

The second way this trade benefits is from price movement (Delta) either up or down. This is because I am using a 2:1 ratio of long to short options in my calendars, so with a big move in stock price my long options increase in value more than the short options lose value because there are more long options than short options . This gives me limited risk but unlimited reward potential if I am lucky enough to have a large price move up or down.

The third factor that slightly affects the trade is time (Theta). The trade is slightly Theta positive, so over the course of a month I can make a small profit due to the erosion of time value of my short options. So if the stock doesn't move, and volatility doesn't change, I still will make a small profit due to the passage of time.

The risk of the trade is if the stock goes down (the trade starts slightly bullish) and volatility also goes down. Usually volatility goes up when a stock goes down, but if it doesn't I will have a losing trade. It should be a small loss though. From what I have seen thus far, you generally will have several positions with small gains, a couple with small losses, and a gem or 2 with a large gain. I plan on posting some of my trades here including the closing of the current open trades as well as new trades I find.

Below is a picture of a risk graph of a typical PCCRC. When viewing the risk graph keep in mind that if volatility goes up, the entire graph shifts upward. After a few days a successful PCCRC trade will often have the entire risk graph above the 0 profit line.