Timeline Call

Timeline CallThe timeline call is a great binary options strategy. It challenges the trader to get their timing right but for the less gung-ho punter it also gives them a second bite of the cherry.

In financial markets timing is everything; anyone can claim to have called the market correctly if they wait long enough. But there is a downside to waiting as that most noble and erudite Englishmen, Lord Keynes, pointed out in one of his more insightful moments: “In the long-run we are all dead”! The timeline call rewards the trader in accord with the trader’s timing of entry. The timeline is the trade guaranteed to test not only the traders directional forecasting, but more importantly the trader’s prowess in timing.

Timeline Call GreeksBelow Lower StrikeBetween StrikesAbove Upper Strike
Delta+ve+veN/A
Gamma+ve+veN/A
Theta-ve-veN/A
Vega+ve+veN/A

Timeline Call Settlement Values

The timeline call is akin to a conventional call calendar strip. The strategy is made up of a strip of one-touch calls with the same strike but different expiry dates. (A strip consists of buying a series of calls (or puts) with the same strike and different expiries or the same strike and different strikes).

The incremental payout is a function of the number of expiries and is equal to 100 divided by number of expiries, i.e. an increment of 25 reflects 4 expiry times, an increment of 20 reflects 5 expiries.

Figure 1 shows the stepped reduction in settlement prices.

Timeline Call

Fig.1 – Hang Seng Timeline Call Settlement Prices – Expiries 4, 3, 2 & 1 Day

1.      If the level of the Hang Seng hits 22000 during the first day then the timeline call immediately finishes and settles at 100. If the level of the Hang Seng does not trade at 22000 during the first day then…..

2.      …..if the level of the Hang Seng hits 22000 during the second day then the timeline immediately finishes and settles at 75. If the level of the Hang Seng does not trade at 22000 during the second day then…..

3.      …..if the level of the Hang Seng hits 22000 during the third day then the timeline immediately finishes and settles at 50. If the level of the Hang Seng does not trade at 22000 during the third day then…..

4.      .…..if the level of the Hang Seng hits 22000 during the final day then the timeline immediately finishes and settles at 25. If the level of the Hang Seng does not trade at 22000 during the final day then…..

5.      ……the timeline call settles at 0.

Timeline Call w.r.t. Time to Expiry

Figure 2a is an example of the Hang Seng 22,000 timeline call which takes the settlement illustration of Figure 1 and adding a third axis which is the Hang Seng index price. Figure 2b offers an overhead view of same.

Timeline Call

Fig.2a – Hang Seng Timeline Call F.V. w.r.t. 4 Days to Expiry and 30.0% Implied Volatility

 

Timeline Call

Fig.2b – Hang Seng Timeline Call F.V. w.r.t. 4 Days to Expiry and 30.0% Implied Volatility (Overhead view)

The bottom left axis of Fig.2a displays the days to expiry. The time increment determining a settlement price decrease is one day. The right hand axis shows the Hang Seng Index price. The timeline call peak of 100 indicates that the Hang Seng index reached 22,000 with over 3 days to expiry. As the time to expiry decreases the maximum level at which the timeline call can settle decreases by 25 each day.

The above example is for 4 days duration but could work just as easily for one-hourly bets with time increments of fifteen minutes. Alternatively, the strategy could be set so that the time increments are monthly but start in, say, 120 days as Figure 3 illustrates.

Timeline call

Fig.3a – Hang Seng Timeline Call F.V. w.r.t. 120 Days to Expiry and 30.0% Implied Volatility

 

Timeline call

Fig.3b – Hang Seng Timeline Call F.V. w.r.t. 120 Days to Expiry and 30.0% Implied Volatility (Overhead view)

Timeline Call w.r.t. Implied Volatility

Implied volatility is an important input to the timeline call since the higher the volatility the greater the chance of the strike being breached. In Figure 3 the implied volatility is set at 30% where at 120-days to expiry the timeline call is worth 24.02. On purchasing this one-touch binary option the Hang Seng has 30 days to rise to 22,000 and hit the jackpot (100), a return of 416%. But if it missed that timeline but hit the 22,000 mark with 30+30+29=89 days to expiry then the timeline call settles at 75, a return of 212%. And so on with settlement values of 50 (108%), 25 (4.1%) and 0 (-100%).

Say in Figure 3 the Hang Seng is trading at 20,300 and a speculator feels that, one the market is a bit ‘toppy’ and two, the market is going to go through a quiet patch for a few months. At 20,300 the above 22,000 timeline call is worth about 50 with implied volatility set at 30%. Therefore this strategy at inception can be equated to a toss of a coin in terms of losing one’s stake, i.e. there is a 50:50 chance that Hang Seng will travel up to 22,000 within the next 30 days. The time passes and the underlying does not change and the timeline call is now valued at 34.74 since the maximum loss is reduced to 25, i.e. 75 settlement price less price of 50 timeline call at inception. With the passing of another 30 days the timeline call’s maximum settlement price becomes 50 and the trade cannot lose.

Timeline Call and Implied Volatility

But what are the implications of implied volatility changing on the above two trades? Figure 4a illustrates a decrease in implied volatility to 15% (a bit drastic but this for illustration purposes) while Figure 4b illustrates Figure 3 with 60% implied volatility.

Timeline call

Fig.4a – Hang Seng Timeline Call F.V. w.r.t. 120 Days to Expiry and 15.0% Implied Volatility

For the timeline to be worth 24.02 with 119 days remaining the Hang Seng has to travel up to 20,400 from 20,300 in a day making the point that the level of volatility one enters the trade can have a significant impact one’s returns.

The seller of premium at 50 has called the market correctly. With Hang Seng unchanged at 20,300 and 119 days remaining the timeline call is now only worth 20.7 with a rise in the Hang Seng to 21,100 needed for the timeline to still be worth 50.

Figure 4b illustrates that with 60% implied volatility how the above long and short premium trades have fared. The timeline call has increased from the 24.02 to 51.72 while the writer at 50 has seen his short premium position cost 21.5 ticks as that timeline is now worth 71.5.

Timeline

Fig.4b – Hang Seng Timeline Call F.V. w.r.t. 120 Days to Expiry and 60.0% Implied Volatility

Timeline call vega is an important consideration when weighing up this strategy. It is clearly head and shoulders a better trade than a straight forward binary call option for taking a view on volatility or taking in time decay since there is no risk reversal consideration, i.e. a short vega or theta position cannot turn into a long vega or theta position above the strike. Arguably it is also a much better instrument than a conventional call for trading vega and theta, especially when writing conventional call options, owing to the potential unlimited downside risk of such a trade.

Practical Usage of the Timeline Call

The above examples work well for indices, but the nature of the timeline suggests that it may have particular attractions for those trading STIRs. For example, a rise in US rates is in the pipeline but no one is exactly sure when the Fed may act so this strategy could attract major interest in the Eurodollars futures and options market.

Prior to oil breaching the $100 mark there was months of speculation as to when this momentous event would take place; the timeline call would have been the perfect speculative instrument.

Evaluation of the Timeline Call

The timeline call is:

Timeline Call = (One-Touch Call(T1) + One-Touch Call(T2) + One-Touch Call(T3) + One-Touch Call(T4)) / 4

or should there be 5 time periods:

Timeline Call = (One-Touch Call(T1) + One-Touch Call(T2) + One-Touch Call(T3) + One-Touch Call(T4) + One-Touch Call(T5)) /5

where T1……T5 are the separate times to expiry of the binary options one-touch call.

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