Ok Dr. No!
First, you should read McMillan's Chap.#25 on LEAPs. You need to at least know what the instruments do. LEAPs are a wordy name for long term options but PUTs and CALLs.
There are some major reasons why CCing with LEAPs in place of the underlying stock is to your advantage:
1. You can buy the LEAPs much cheaper than you can the stock itself. That is a savvy way to buy expensive big name stocks and still trade like the big boys. If you can CC with MOT and the stock is selling for $50/share x 100 = $5,000 to write 1 CC contract. If you have $5,000 to invest you could pickup 4 MOT LEAPs for the year 2,000 for around $1,100 each. So, that's 4 CC contract you could write per round. Imagine, the same CC you would write with the stock could be written against the LEAP? You can see the rate of return is a no-brainer.
2. In a LEAPs CC setup, if you are called out of your CCs your LEAPs will automatically be excercised at the CC strike price. The difference between the CC strike price you wrote is subtracted from the LEAP strike price and you get to keep the difference. So, your LEAP Strike is at $10 and your CC Strike is at 12 1/2 you get $12 1/2 - $10 = $2 1/2 to keep plus the CC premie(s) you collected along the way. Of course, all of out W.I.N. CCing rules apply here. That means use the RSI and BB as your timing guide and know when to write the CCs in the first place. Either you are playing cat and mouse as the stock is moving up in price or you are cushioning your downward cycles with deep in the money CCing with heavy cheap PUTs as your sideshow! Remember, your net cost basis must be below the CC strike prices in order to always be in the black.
3. The trading dynamics of the LEAPs compared to the stock (stock moves up in price, LEAPs move up in price, etc.) are just about the same EXCEPT one! NEVER hold the LEAP past the 50% time value remaining. So, a year 2,000 LEAP from today to the expiration month you should calculate the calendar month in which the LEAP will be in the 50% range left in time. Reason? The time value will start to erode in the LEAPs and that will work against you from that point on! Basically, your rate of return on the CCs will start to drop. It is just as easy to dump the LEAP by selling it and buying another LEAP to 2,003 to repeat the process if you still like the stock.
Recent dialog on LEAPS:
Message 5389649
|
