RE: Selling leaps
I was asked in PM about my current thoughts on this, and gave this response. I think this is consistent with your thoughts on it.
Since I have realized that the deltas on leaps are higher than I had thought they were, I have changed my approach and will probably only sell leaps under one circumstance. That is, in response to a margin call. The reason is that, if the maintenance requirement is 30%, and the margin call for example is $10,000 (cash), then it is necessary to sell $10,000 / .3 = $33,333 of stock to meet the call, but one can meet the call by selling only $10,000 worth of leaps (provided that the leaps are out-of-the-money). This also allows one to avoid triggering a capital gain that would happen if one sells the stock. When my portfolio recovers and I again have buying power, I will buy back the leaps. This will cost more money, but the loss will be less than if I had sold $33,333 of stock (and lost the subsequent appreciation on the $33,333 of stock). This also has the benefit of generating a short term capital loss for tax purposes, which can offset any short term capital gains I might incur in other transactions.
JB |
