Last edited by Toronto.gal; 2011-12-06 at 03:26 PM.
Hahaha, classic hp!
Originally Posted by humble_pie
Good old covered leaps - thanks for laying out that strategy HP. I plan to go back over my strategy over the holidays to prepare for 2012 and this brings up another aspect I need to consider.
I assume I won't be able to do this inside a registered account. Sigh.
what happens to buy and hold? dead?
No one holds anything over a year these days?
A Year? I dont hang to much more than a month!
I call it buy and hope. Lots of folks believe it's the best way to do it, and for some that are not inclined to learn and spend the time to do it themselves maybe it is. Personally I wish to protect myself from the possibility of large losses and options let me do that.
Originally Posted by Uranium101
That doesn't mean I don't hold anything over a year - just that I use options to protect my investments against large losses and to generate additional yield where I can.
If you were to buy and hold, why do you needs the options?.
Dont options protect you from downside risks and cap you from up side gains?
Isnt the same as lighten up on your positions. It has the same effect. Once you've decrease your holdings, your down side and up side get decreased.
Humble may well chip in and clarify but Options go far beyond just protecting from Downside and Cap from up side.
Once you understand them, (not that I claim any expertise, very beginning for me understanding these also) you could "rent" (covered call) your stock out and collect a premium that would increase your annual return, can make the difference between making a 5-6% return or making a 30-40% return over a few years. Very attractive on stocks that are stable and already pay a healthy dividend.
I also would like to thank Humble for the detailed layout for CCJ
Humble, just so I understand the end game with the CCJ spread. If stock goes up to $22.00 then we get exercised and use the Leap Call to fill: Make approx 40%
If stock keeps going down, then is when we would try to sell another C say at 18 if CCj at 16$? Would we have to buy the 23Call to close it out before?
(Margins + Line of credit ) * options
betzy example was a june 23, even if stk went to 25 we wouldn't necessarily be early exercised on the june 23, there would be ample opportunities to buy it back before expiration & sell another farther out in time (by the time this exercise is being played out the sep 2012, possibly the dec 2012 & certainly the jan 2013 options will be candidates.)
or, in a soaring advancing market, one could choose to both exercise & be exercised, as you have correctly analyzed, for a nifty short-term profit.
in general, a diagonal call strategy like the ccj example means working the ongoing sale of short-term calls the same way that we work em in covered writes, when we hold the stock itself. However, the cover or the long leg is a LEAPs option instead of the stock.
in the example, one would have from now until 3rd friday in jan 2014 to keep on selling calls, all with strike prices above 10.
you have raised an example of next selling an 18 call if, say, stk would have dropped to 16 (i'd always advocate for the buying-back-to-close of the june 23, of course.) Yes, one could certainly do as you suggest & sell the 18, but keep in mind that now the potential gain drops from 13 (23-10) to 8 (18-10.)
are we ok so far.
the thing i like about the ccj diagonal - and there are many others like it - is the ultra-low strike price of the long LEAP. There's very little tv - theoretical or time value - in the premium. It's almost all intrinsic value. By paying close to intrinsic value, one is leasing-to-buy the stock, stripped of its dividends, at less than half price.
i myself buy extreme deep-in-the-money LEAPs for diagonal spreads, although i believe many others will buy leaps with higher strikes because they are cheaper.
what i like about the extreme ditm prices is that, for the life of the leaps option, there is always something to sell, even if the market falls into the garbage pit.
suppose cbj were to fall to 12 in crashed markets but one had unfortunately bought a 2014 $18 leap. There would be no premium worth selling in the short-term 20 or 22 calls. There could be some premium worth selling in the short-term 14s or 15s, but one would be opening an uncovered risk window in that one would be potentially short at 14 but only covered at 18.
but with that $10 leaps call as bedrock, even in a disaster i've still got some lavender to sell, like poor liza in covent garden.
Last edited by humble_pie; 2011-12-07 at 12:21 AM.
Awesome Humble, perfect explanation and Thank you again. I do get it