Hello David,
Sorry, for the time lag in responding. I'm three days
behind on the email responses. This week there was a flood of messages. WOW! What is going on????
Here are your questions on LEAPs:
1. Do I gather that your recommendation is to buy as long term as possible ATM, write against if for a few months, then sell before time decay works against you?
Yes, I tend to go out a few months as you indicated. It depends on your intentions. I like as much money in my pocket at possible. I like as much time as possible. I don't want to be looking at the stock everyday. Three months out affords me the time to look at it once in a while and stay on target.
2. If you buy ATM, then can I assume that if the underlying stock price rises, there should be a decent rise in the leap option, provided the time decay is not too great to offset the gain?
Sure! As long as you net cost basis is below the CC strike and it covers your cost to buy the LEAP, you will have a profit. If you sell the CC at the right time, the LEAP and stock may pull back and you get to keep the CC premies to offset your price decay. At expiration, you either get called out (if you want) and repeat the process. Or, you don't get called out and get to repeat the CC process. Hopefully, at a higher stock price which will be reflected in the LEAP. In the early stages in the life of the LEAP the time value is pretty high. Any intrinsic value really pumps up the ROI. It is possible to really rack in some serious ROI. 40% to 100% unmargined per year doing LEAP spreads is more common than not if you employ and following the WINs approach.
3. Although buying an OTM leap may be cheaper, the price will not rise as much as the ATM, because the delta is less. Correct?
Correct! Always buy as much ITM LEAP intrinsic value as you can afford. It gets much easier as you gain experience, working capital and confidence in the mechanics of doing LEAPs calendar spreads. It is still cheaper than buying the actual stock itself. Thus, you have less money at risk! I rather risk $5,000 in LEAPs value (and my money) than $13,000 in stock actual dollar value.
4. If one was fortunate enough to have a leap which has been steadily rising, and is strongly OTM as it approaches a year out, why not keep the leap until expiration, and continue to write against it? Is it due to the basic concept of taking your profits while you can? I am torn on this concept. Because the idea of continuing to safely write against a leap that is strongly OTM, and which you have closely followed, is attractive.
You would need to monitor the number of rounds of CCs, therefore, your rolling adjustable net cost basis (nut) vs. the price increases or decreases in the underlying stock. So, yes! It's possible to have quite a bit of intrinsic value built up in the LEAPs and therefore the time decay is so small that you continue holding them. It all depends on how will you have read the charts and sold CCs. Now, if you really screwed up and covered at a loss over and over again, you net cost basis would be pretty high and you may have to dump the LEAPs.
I believe that covers it! I'm still getting my data together for the LEAPs data on my web page. That table will spell out all the LEAPs and the best CC percentages. This weekend I will just list all of the LEAP that are out there. Programming is not my favorate past time. |
