RE: Leaps vs. stock strategy
First of all, don't just listen to me. Others on this thread may have other ideas. Some don't agree with my view of the relative movement of leaps prices.
My idea of holding an option to the expiration date may also run contrary to the ideas of others. If the option is fairly deep in the money as it approaches expiration, then there is not a rapid loss of time value. Rapid loss of time value occurs close to expiration date when the option is at the money or barely in or out of the money, because the option is highly leveraged in that case and the holder pays for the privilege of such high leverage.
As you know, options are not marginable, so when you spend a dollar on an option you lose the opportunity to spend $2 on a marginable stock. For long term positions, I recommend using margin at whatever level makes you comfortable, and avoiding options.
I personally use options only in my IRA where taxes don't matter and where margin debt is not permitted. I choose an expiration date about 6-9 mos. out and a strike price at about 75% of the current price of the underlying stock.
If you want to use options in a taxable account, I would only do so if you have a strong opinion that the underlying stock (e.g., Dell) is likely to appreciate very rapidly in the near term, and then I would buy a relatively near term call at or a little above or below the money. Frankly, because of the high premium involved, I personally don't really like these odds.
JB |
