stone wrote:
I'm totally ignorant about this. Is part of the reason why the LEAPS PP has done so well recently is because we have made a transition from a period of mild price volatility when the options were purchased to exceptional price volatility now? If someone were to buy options now and then things quietened down, would they loose out? Is having a LEAPS PP rather than a regular PP basically a bet on future panic? If so, then might it make sense to just have regular stocks balanced against LTT and gold options since panic is unlikely to be good for stocks? So have a variable portfolio that was say 80% stocks, 10% LTT call options, 10% LTT call options?
Stone, that is an interesting thought. I think you meant 80/10/10 stocks, TLT options, and GLD options, right? In my opinion, the LEAPS PP is similar to the 2x leveraged PP, except you're cranking the leverage up to about 6x or 8x. The time period that Adam and I purchased was right around the August 2nd debt ceiling fiasco, and both of our test portfolios benefited greatly from the jump in long bonds and gold.
If you were to purchase in a time of relative economic stability, you might not have a great enough price movements to make your options worth much. Another big risk is that your options are worth almost nothing by the time you sell them, if those assets have dropped in value.
I think the LEAPs PP is worth pursuing with a small amount of play money in a VP, but it would require extensive backtesting and speculation to convert your entire PP to an 80/10/10 portfolio. The problem with backtesting is that options on GLD and TLT have not been around that long, so it's difficult to really tell what would happen in certain scenarios.
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines. Not that I'm complaining, of course." -ZedThou