Mike, interesting info on that couple and their LEAPS strategy (thanks for correcting my spelling!). I will have to think about that sales strategy next year, at least in my retirement account (assuming I can keep my hands still till then!). Like many things in the investing world, it seems this is an area where education can have a big payback. After I finish the Gorilla Game and the Tornado and Chasm books, I will try to read up on options (any recommendations?).
Greg, you mentioned that LEAPS are available in retirement accounts. Though it's not unheard of, that's not my experience on a regular basis.
I use Fidelity, and I like them a lot. There was no problem at all setting up there to do level 2 option trading. The only thing I would do at this point with my limited sophistication in options is buy to open (or sell to close) calls or puts. Level 2 will let you do that.
You also mentioned that options can only be purchased with cash. If that's the case, it's purely a matter of accounting. As an example, I recently bought some Q LEAPS in a taxable account in which there was no cash.
I would assume you made this purchase on margin? If so, what happened is you drew down from your "available to borrow" balance (which you could withdraw as regular cash if you wanted to), as opposed to your "available to buy" balance (which is the amount you could use to buy equities on margin, and would be double the amount of your cash borrowing power). So in that case, you are using the marginability of your other securities to "borrow cash", but the options you buy will not count as margin collateral; they will be "dead money" as far as margin is concerned, just as if you took the cash out of your account to buy a car. Note: When you did this (assuming that's what you did), the amount you borrowed will count "double" in reducing your available to buy balance and will lower your margin equity percent commensurately. For me, since I ONLY have options in my taxable account, there are no securities I can use as margin collateral. Therefore, I'm in a "cash only" situation. If you go 100% to LEAPS, I think that would be the case at Ameritrade too. The good thing about a place like Fidelity is that you can get an educated person on the phone to explain all this to you. They seem pretty happy to help you figure things out in advance before something goes screwy. I may eventually leave Fidelity if I want to carry a 50% equity margin on a one-security "portfolio" (HAH!) since they are conservative and raise the house call limit to 60% in such cases. Until then, I'm pretty happy with them.
Greg |
