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LEAPS PP

Posted: Tue Aug 02, 2011 4:42 pm
by AdamA
I just setup a virtual trading account at OptionsExpress.com with the following positions

1/3 SPY Jan 2013 Call
1/3 GLD Jan 2013 Call
1/3 TLT Jan 2013 Call

(all at the money options).

My plan would be to rebalance in one year, selling losers with one day left in the year, and winners the next day for tax reasons.  I'd then rebuy the options with later expiration dates.

Does anyone think that such a plan could work?

Note, this is a virtual account and contains no real money. 

I didn't use a cash ETF b/c none of them have LEAPS as far as I can tell.

Re: LEAPS PP

Posted: Tue Aug 02, 2011 4:44 pm
by MediumTex
I'm anxious to see how that goes.

The theory seems sound, though it is obviously a lot more speculative than a regular PP.

Re: LEAPS PP

Posted: Tue Aug 02, 2011 4:46 pm
by AdamA
MediumTex wrote:
Obviously a lot more speculative than a regular PP.
Absolutely, I should have titled the post a LEAPS PP-like VP or something.   :)

Re: LEAPS PP

Posted: Tue Aug 02, 2011 4:51 pm
by MediumTex
It's sort of like taking a machine tool that is balanced for 1,000 RPM operation and speeding it up to 10,000 RPM.

If the balancing in the tool is perfect, it might operate fine (putting aside the power and heat issues), but if there is ANY little wobble in the machine that isn't detectable at 1,000 RPM, you may find that the machine shakes itself apart long before it gets to 10,000 RPM.

Another analogy might be an aircraft that flies fine at 400 mph but would shake itself apart at 1,200 mph.

Like so many things with the PP, I suspect that it is optimized for a certain RPM, which is probably normal market action not amplified through the use of options, but I look forward to seeing how the experiment unfolds.

Re: LEAPS PP

Posted: Tue Aug 02, 2011 5:00 pm
by AdamA
MediumTex wrote: It's sort of like taking a machine tool that is balanced for 1,000 RPM operation and speeding it up to 10,000 RPM.

If the balancing in the tool is perfect, it might operate fine (putting aside the power and heat issues), but if there is ANY little wobble in the machine that isn't detectable at 1,000 RPM, you may find that the machine shakes itself apart long before it gets to 10,000 RPM.

Another analogy might be an aircraft that flies fine at 400 mph but would shake itself apart at 1,200 mph.

Like so many things with the PP, I suspect that it is optimized for a certain RPM, which is probably normal market action not amplified through the use of options, but I look forward to seeing how the experiment unfolds.
That's a great analogy, and I suspect such a portfolio will be subject to an eventual catastrophe...although I have to say, I can't really think of what it would be...

I'll post occasional updates.

Re: LEAPS PP

Posted: Tue Aug 02, 2011 5:03 pm
by MediumTex
Adam1226 wrote: That's a great analogy, and I suspect such a portfolio will be subject to an eventual catastrophe...although I have to say, I can't really think of what it would be...
How about just an unusually low amount of volatility across the three volatile PP assets, or perhaps a period like the early 1980s where all three volatile PP assets lost value?

Re: LEAPS PP

Posted: Tue Aug 02, 2011 7:54 pm
by Odysseusa
This portfolio sounds very interesting. Please keep us updated. Thank you.

Re: LEAPS PP

Posted: Tue Aug 02, 2011 8:45 pm
by clacy
Has anyone looked into simulating the HBPP with futures?

Re: LEAPS PP

Posted: Wed Aug 03, 2011 1:57 am
by AdamA
MediumTex wrote:
Adam1226 wrote: That's a great analogy, and I suspect such a portfolio will be subject to an eventual catastrophe...although I have to say, I can't really think of what it would be...
How about just an unusually low amount of volatility across the three volatile PP assets, or perhaps a period like the early 1980s where all three volatile PP assets lost value?
These could both cause problems.  You could probably decrease the risk by using deep in the money calls instead of at the money calls, although I could definitely a 3 asset decline casuing pretty big losses. 

May also be a good idea to hold use a 25% x 4, with 25% held in as cash.

Re: LEAPS PP

Posted: Fri Aug 05, 2011 6:07 am
by AdamA
Adam1226 wrote: I just setup a virtual trading account at OptionsExpress.com with the following positions

1/3 SPY Jan 2013 Call
1/3 GLD Jan 2013 Call
1/3 TLT Jan 2013 Call

(all at the money options).
Since I started this 5 days ago, it's up 16.6%.

I know this is meaningless, but thought people may be interested given the volatility over the past several days.
MediumTex wrote:
It's sort of like taking a machine tool that is balanced for 1,000 RPM operation and speeding it up to 10,000 RPM.
Anything that can go up 16.6% in 5 days can come down just as fast (and probably will).

Re: LEAPS PP

Posted: Fri Aug 05, 2011 6:41 am
by Liz L.
Adam1226 wrote: Anything that can go up 16.6% in 5 days can come down just as fast (and probably will).
Here is why this forum is so great.

Show me another investing forum with this kind of reasoning (as opposed to mindless boasting and self-assertion).

Tex's deprecating his recent successful TLT call was another wonderful example.

This is an extraordinary place.

Re: LEAPS PP

Posted: Sat Aug 06, 2011 6:58 am
by Storm
What an interesting strategy, Adam.  I wonder also how well it would work to do it on a shorter term basis, like say 3 month at the money call options.  Of course, the tax efficiency is nowhere near as good as your strategy, but the bonus is that you don't have to pay the premium for LEAPS.