Howdy Flick,
If you can trade option spreads (calendar spreads, vertical spreads, etc.) with your broker, then you are in an excellent position to really rack in high returns by CCing LEAPs. Technically, what you are doing is using the long LEAP in place of the actual stock and then writing covered calls (CCs) against the LEAPs. It is known as a spread at brokerage houses that allow it!
All the rules for timing your entry using the BB and RSI indicators we discuss over and over on this forum apply. Other than the price direction of the underlying stock, the biggest risk is the time value of the LEAPs. Never allow yourself to be CCing past the half way mark of the LEAP because the time decay will start to work against you and the CC premies will not be as much. It is better to unload the LEAP and buy another one to repeat the process.
So, if you picked up on Jan 03,1999 a JAN 80 strike DELL 2000 LEAP you don't want to CC that LEAP past say July 1999. You would be better off dumping that LEAP in June and buying another LEAP depending where the stock is heading. During that six months time you might have been able to trade two or three CC rounds for a nice
profit off each round. We are looking at 20% to 30% at a clip for each round of CCs. Of course, I'm assuming that you are writing CCs to grab the money and then covering when the majority of the profit is
earned and then covering the CCs. If you can lock in 80% percent of the profit in one month of a three month time span on a CC round, it makes no sense to wait another two months time to write another round of CCs off the LEAP. Turnover generates more premies in this game!
Since, LEAPs are all cash transactions and no margin can be used, CCing LEAPs is a much more conservative investment. The more experienced you are with options trading the more of a sure thing CCing LEAPs is. In fact, I would say it is the closest thing to a no-brainer in the stock market if you follow our WINs approach factors.
I would rather pay $2,200 for control of 100 of DELL shares than the stock price itself of $8,000. Writing a CC for say the 105 AUG @ 7 7/8s right now would generate a 36% return in six months on that $2,200 LEAP by August. You could buy three DELL LEAPs and make a kahuna of a return and leave the extra cash for damage control.
Let the trend be your friend! |
