LEAPS PP

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Gosso
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Re: LEAPS PP

Post by Gosso » Tue Jul 31, 2012 8:48 am

AdamA wrote:
Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
As the options get closer to expiration, the spread closes. 
I had a closer look at the TLT options and you're right.  But the spread is still greater than GLD and SPY.  Although there is a lot disparity, the options with increments of 5 have the most open interest and lowest spreads, but even a few of those have large spreads.  I guess this highlights the importance of limit orders.
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Re: LEAPS PP

Post by AdamA » Tue Jul 31, 2012 10:33 pm

Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
Also, I wouldn't use the deep ITM options.  Just at the money. 
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Re: LEAPS PP

Post by Storm » Wed Aug 01, 2012 6:34 am

Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
It seems that you found an inefficiency in the market.  With enough capital, you could be buying those in the money options slightly before the exercise date and just turning them into TLT for a handsome profit.
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Re: LEAPS PP

Post by pugchief » Wed Aug 01, 2012 10:22 am

Storm wrote:
Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
It seems that you found an inefficiency in the market.  With enough capital, you could be buying those in the money options slightly before the exercise date and just turning them into TLT for a handsome profit.
If you are holding an ITM call option immediately prior to expiration, the last thing you want to do is let it expire, because then you get nothing and lose the premium you paid to buy the option. If you don't want to close out the position at a profit due to the spread, you need to tell your broker you wish to exercise the option, which will result in the shares being delivered to you at the strike price.
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Re: LEAPS PP

Post by Gosso » Wed Aug 01, 2012 12:27 pm

pugchief wrote: If you are holding an ITM call option immediately prior to expiration, the last thing you want to do is let it expire, because then you get nothing and lose the premium you paid to buy the option. If you don't want to close out the position at a profit due to the spread, you need to tell your broker you wish to exercise the option, which will result in the shares being delivered to you at the strike price.
I thought most brokers automatically exercise the option if it expires ITM.  I'd definitely check with the broker to make sure.
Storm wrote:
Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
It seems that you found an inefficiency in the market.  With enough capital, you could be buying those in the money options slightly before the exercise date and just turning them into TLT for a handsome profit.
The reason for the large spreads is because there is literally no volume with deep ITM options for TLT.  Might have to do a little math to determine if it is better to exercise or take the spread hit.  I would think exercising would be the best move.
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Re: LEAPS PP

Post by pugchief » Wed Aug 01, 2012 2:25 pm

Gosso wrote:
pugchief wrote: If you are holding an ITM call option immediately prior to expiration, the last thing you want to do is let it expire, because then you get nothing and lose the premium you paid to buy the option. If you don't want to close out the position at a profit due to the spread, you need to tell your broker you wish to exercise the option, which will result in the shares being delivered to you at the strike price.
I thought most brokers automatically exercise the option if it expires ITM.  I'd definitely check with the broker to make sure.
Storm wrote:
Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
It seems that you found an inefficiency in the market.  With enough capital, you could be buying those in the money options slightly before the exercise date and just turning them into TLT for a handsome profit.
The reason for the large spreads is because there is literally no volume with deep ITM options for TLT.  Might have to do a little math to determine if it is better to exercise or take the spread hit.  I would think exercising would be the best move.
You might be right about automatic exercising. Let us know if you find out more. I also think if you put in a limit order on the day of expiration closer to the ask price [5 to 10 cents], the market maker will often close out the trade anyway. Most of the time, they want to cancel out open interest without actually assigning the underlying.
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Re: LEAPS PP

Post by MachineGhost » Wed Aug 01, 2012 8:51 pm

AdamA wrote: This portfolio returned about 100% over the past year, almost exclusively due to the TLT LEAPS which basically quadrupled (!) in value.  

I will sell all of the positions and repeat again this year.  I will sell the TLT and SPY LEAPS on Aug 2 (1 year + 1 day) b/c they were winners, and the GLD LEAPS tomorrow b/c it was a loser.

As interesting as this idea is to me, there is no amount of backtesting that would ever make me comfortable using it...unless maybe I was really really really rich, and using a very small portion of my invested money.
I'd like to point out that if you use deep ITM LEAP options, the effective margin is only 2:1.  So you're better off using a margin account with regular ETF's than paying the spread and slippage for LEAP options.

Now, if you want to use deep OTM LEAP options that are typically underpriced for fat tail risk, there may be something to it.
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Re: LEAPS PP

Post by Gosso » Thu Aug 02, 2012 8:11 am

MachineGhost wrote:
AdamA wrote: This portfolio returned about 100% over the past year, almost exclusively due to the TLT LEAPS which basically quadrupled (!) in value.  

I will sell all of the positions and repeat again this year.  I will sell the TLT and SPY LEAPS on Aug 2 (1 year + 1 day) b/c they were winners, and the GLD LEAPS tomorrow b/c it was a loser.

As interesting as this idea is to me, there is no amount of backtesting that would ever make me comfortable using it...unless maybe I was really really really rich, and using a very small portion of my invested money.
I'd like to point out that if you use deep ITM LEAP options, the effective margin is only 2:1.  So you're better off using a margin account with regular ETF's than paying the spread and slippage for LEAP options.

Now, if you want to use deep OTM LEAP options that are typically underpriced for fat tail risk, there may be something to it.
Good point on the leverage.  This equation can estimate the leverage of the option:

{[(current stock price) * (delta value)] - (option price)} / (option price)

The ATM options for Jan 2014 are as follows:
TLT = 8x
SPY = 5x
GLD = 3.5x

It's not a perfect calculation, and I'm unsure how well it works for LEAPS since they have so much time value in the price, but it at least gives us a comparison.  To balance this to a 5x PP, we'd have to buy ITM for TLT, ATM for SPY, and OTM for GLD.
pugchief wrote: You might be right about automatic exercising. Let us know if you find out more. I also think if you put in a limit order on the day of expiration closer to the ask price [5 to 10 cents], the market maker will often close out the trade anyway. Most of the time, they want to cancel out open interest without actually assigning the underlying.
I found this on the OCC website:
EXERCISE BY EXCEPTION
“Exercise by exception”? is an administrative procedure used by OCC to expedite the exercise of
expiring options by Clearing Members.1 In this procedure options which are in-the-money by specified
threshold amounts are exercised unless the Clearing Member submits instructions not to exercise
these options. “Exercise by exception”? is a procedural convenience extended to OCC Clearing
Members, which relieves them of the operational burden of entering individual exercise instructions for
every option contract to be exercised. It is important to note “exercise by exception”? is a procedure
between OCC and its Clearing Members and is not intended to obviate the need for customers to
communicate exercise instructions to their brokers:
“The exercise thresholds provided for in Rule 805(d) and elsewhere in the rules are part of the
administrative procedures established by the Corporation to expedite its processing of exercises
of expiring options by Clearing Members, and are not intended to dictate to Clearing Members
which positions in customers’ accounts should or must be exercised.”? (Rule 805, Interpretation
.02)

EXERCISE THRESHOLDS
Expiring options subject to exercise by exception use the following thresholds to trigger exercise:
Equity options: .01 per share in-the-money in all account types. Index options: $1.00 per contract inthe-
money (.01 index value) in all account types.
Expiring options are determined to be in-the-money or not based on the difference between the
exercise price and the “closing price”? of the underlying security.
The PDF can be found here: http://www.theocc.com/webapps/infomemos ... ate=201201

It seems that anything above ATM will be exercised, but still might want to call broker and conform all this.
Last edited by Gosso on Thu Aug 02, 2012 8:21 am, edited 1 time in total.
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Re: LEAPS PP

Post by AdamA » Thu Aug 02, 2012 11:55 am

pugchief wrote:
Storm wrote:
Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
It seems that you found an inefficiency in the market.  With enough capital, you could be buying those in the money options slightly before the exercise date and just turning them into TLT for a handsome profit.
If you are holding an ITM call option immediately prior to expiration, the last thing you want to do is let it expire, because then you get nothing and lose the premium you paid to buy the option. If you don't want to close out the position at a profit due to the spread, you need to tell your broker you wish to exercise the option, which will result in the shares being delivered to you at the strike price.
I would just sell the option at the one year mark (with 6 months left to expiration).  That's enough time to let the spread close a bit.  Also, cushions you from time decay a bit.
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Re: LEAPS PP

Post by Storm » Mon Oct 22, 2012 11:59 am

So, this is depressing - I just passed the 1 year (long term capital gains) mark last week and the market has thoroughly tanked...

My options, which expire Jan. 19, 2013, are only worth $8,439, and you might recall they were purchased for over $10K.

Would anyone like to help me with an exit strategy?  Hold on and hope for some market movements, or just cut my losses now?  A few weeks ago I was looking at a slight (maybe 2%) profit.

I'm a great investor, but I'm terrible at trading...  :(
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Re: LEAPS PP

Post by Gosso » Mon Oct 22, 2012 1:22 pm

Storm wrote: So, this is depressing - I just passed the 1 year (long term capital gains) mark last week and the market has thoroughly tanked...

My options, which expire Jan. 19, 2013, are only worth $8,439, and you might recall they were purchased for over $10K.

Would anyone like to help me with an exit strategy?  Hold on and hope for some market movements, or just cut my losses now?  A few weeks ago I was looking at a slight (maybe 2%) profit.

I'm a great investor, but I'm terrible at trading...  :(
I'm not sure about the timing, but when you sell make sure to use a limit order and pick a price at around the mid-point of the bid/ask.  Typically the market makers in options do not advertise their true spread.  At least that was my experience with ITM GLD options.
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Re: LEAPS PP

Post by AdamA » Mon Oct 22, 2012 11:43 pm

Storm wrote: So, this is depressing - I just passed the 1 year (long term capital gains) mark last week and the market has thoroughly tanked...

My options, which expire Jan. 19, 2013, are only worth $8,439, and you might recall they were purchased for over $10K.

Would anyone like to help me with an exit strategy?  Hold on and hope for some market movements, or just cut my losses now?  A few weeks ago I was looking at a slight (maybe 2%) profit.

I'm a great investor, but I'm terrible at trading...  :(
I'd sell and rebuy similar options with later expiration dates...
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