Re: Writing CC's against LEAPS -- Yes, you can use basically the same stategy as with writing CC's against stock. When using LEAPS you have the advantage that your investment and risk in the position is limited to the amount of premium you pay for the LEAPS, rather than the purchase price of the stock, which is more. You can invest the difference, or if you don't have that much investment capital to begin with, buying the LEAPS gives you a way to play the CC game. Of course, unless you buy in the money LEAPS (not recommended--too expensive) you are potentially risking the entire premium, which is all time value, but we hope we are picking a good stock which is going to go up over time. And in the meantime we can write CC's against the LEAPS to offset our cost.
The biggest problem I have with using LEAPS for this purpose, rather than just ordinary options 6 months out, is that it is hard to find strike prices high enough to make them a good value. For example, if you were looking to establish a position on CPQ, with the stock now at 75, the highest strike LEAPS you can get for JAN99 are the 80's at 17 1/2. To establish a position of 10 options would cost $17,500. By comparison, you can get APR 98 85's at 8 3/4, which is more affordable. Of course, you will need to re-establish your position in long calls by April 98, which let's say costs the same for another 6 months, so you end up with about the same total cost in the long run. The advantage is that you're committing less to establish your long position each time, so your risk of loss is more limited if the stock should decline.
Because you're using the long options as part of a spread, they need to be further out in time than the options you write, and far enough out that day to day time decay is not a significant factor, i.e. at least 3 months out. You want the options you buy to be far enough out in time that you will have enough time to play swings in the stock to recover your initial investment and more before they get close to expiration. That way even if the stock doesn't rise all the way up to the strike of your long calls by expiration, you can still make money.
It is important to be aware of the margin requirement--if you decide to write options that are lower in strike than your long options, you will have a margin requirement of the difference in strike prices for each option you write. For example, if you write 10 OCT 75's against 10 APR 85's, your margin is $10,000 (10 x (85-75)). As time goes on, if the stock trends upward, your short positions will also trend upward from month to month, and your margin will decline and eventually go away once you start writing at the strike of your long calls or higher.
Another thing is that in time AS you are successful (we are all successful on this thread), you may end up with long options that are significantly in the money. For example it is not unreasonable to expect that CPQ may be at 130 a year from now. If you bought JAN99 80's, they would be at about 51 at that point, which represents a large potential risk if the stock were to decline. My preference is to reduce my risk and take some profit money off the table as I go along, adjusting my long position to a higher strike with a lower exposure.
TM |
