LEAPS PP

[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.

[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.

[AdamA]

Obviously a lot more speculative than a regular PP.

Absolutely, I should have titled the post a LEAPS PP-like VP or something.  

[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.

[AdamA]

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.

[MediumTex]

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?

[Odysseusa]

This portfolio sounds very interesting. Please keep us updated. Thank you.

[clacy]

Has anyone looked into simulating the HBPP with futures?

[AdamA]

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.

[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).

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.

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).

[Liz L.]

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.

[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.

[AdamA]

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.

Storm--

PP options strategies are interesting.

I think they can be a lot of fun as long as only small amounts of money are involved.  It's more like going to the racetrack than it is investing. 

One thing that is fun to do is to pick whatever asset class is getting ragged on the most in the financial media and buy a short term call on it. 

The reasons I chose LEAPS over a shorter term expiration are 1. taxes, and 2. b/c I believe that the majority of the time value of an option (like 3/4ths) is lost after the 3 month mark. 

So if you have months left when you're rolling over your calls, you can mitigate some of the risk that might occur if you waited until closer to expiration and then something dramatic happened (b/c your options would at least have some time value left to cushion the blow from any intrinsic value lost). 

May help the aircraft not to shake itself apart as rapidly.  Also probably a good idea to use deep in the money options, if you can afford it. 

For the record, I suspect that this strategy would probably have some impressive gains at times, but I doubt that it would perform much better than the regular PP...at least enough better to justify the downside volatility.

[TripleB]

Since I started this 5 days ago, it's up 16.6%.

If I were you, I'd cash out at 16.6% return in 5 days, count myself a winner, and not look back. You made a huge gain in the VP for the year, and if it takes you another 12 months to find another worthwhile short-term speculative strategy to try, you are still a winner.

[MediumTex]

Since I started this 5 days ago, it's up 16.6%.

If I were you, I'd cash out at 16.6% return in 5 days, count myself a winner, and not look back. You made a huge gain in the VP for the year, and if it takes you another 12 months to find another worthwhile short-term speculative strategy to try, you are still a winner.

I think he just set up the portfolio for tracking purposes.

[AdamA]

Since I started this 5 days ago, it's up 16.6%.

If I were you, I'd cash out at 16.6% return in 5 days, count myself a winner, and not look back. You made a huge gain in the VP for the year, and if it takes you another 12 months to find another worthwhile short-term speculative strategy to try, you are still a winner.

I think he just set up the portfolio for tracking purposes.

Correct.  This is just an experiment.  No real money.

[Verto]

We are in an interesting time. I am glad that we have so many people paper testing interesting strategies right now.

[mkareti]

does OptionsXpress or TOS or Options Monster back testing capability for such LEAPS portfolio?
I have been thinking of such a strategy of  buying LEAPS esp. when the ETF  is above > 100 or 200 day Moving Avg.

[Storm]

Adam,

How are your LEAPs doing so far after today (Monday, 8/8/11)?  I started a Virtual account on OptionsXPress over the weekend and I'm testing 2 theoretical portfolios:

• Roughly $25K of Jan/2013 maturity at the money call options, split equally between SPY/GLD/TLT.
• Roughly $10K of Nov/2011 maturity at the money call options, split equally between SPY/GLD/TLT.

The problem is that all of my orders went through at market open today so my buy-in is MUCH different than yours.

I'll let you know how this goes!

[Storm]

Definitely considering an investing strategy that involves monthly rolling Options purchases.  Here is the basic strategy:

Take $10K each month and purchase equal 3 month at the money call options on each of SPY/GLD/TLT.

$120K invested each year, some months you may lose it all, others may pay handsomely.

My big question is entry/exit strategies - can anyone give me an idea of what a good time to enter/exit the market is?  Obviously you don't want to do it on the 1st of the month every month, as that might just be too predictable.  Maybe enter the market randomly on a day in the 1st week of the month.

Exit strategy - this is tricky - if you have great appreciation in an option should you sell early, or hold until maturity?  This type of portfolio needs some serious risk analysis chops to maximize potential profit.

I'm a total options noobie so I appreciate any help here.

[stone]

I'm grossly ignorant about options and I don't think I'll ever buy any but the Jesse Cafe Americain website makes the case that gold options expiry dates have a big influence on the short term cycling of the gold price. If you believe that argument, then I guess you would only hold your options PP from each gold expiry date until say ten days before the next (am I in a muddle about this?). Are most of the gold options bought by people who have an almost all bond portfolio and just want some inflation insurance?
Clive mentioned something before about Nassim Taleb recommending using a portfolio consisting of 80% cash, 20% options. I guess though that if we have a succession of 1982 type Volcker rate hikes, the losses from the options will steadily munch through the cash. I suppose though that is very unlikely to happen.

[Storm]

I suppose with options that are "in the money", yet some weeks out from exercise date, it may be wise to employ a strategy of selling some percentage, say 30%, or selling enough to cover your costs, then keeping the remainder, or setting a stop loss on the rest to protect your winnings.

If you're a math geek there is a lot of potential to maximize profit by timing your exit appropriately, and exiting in stages.

Similarly, Clive's theories around stock entry strategies might be ideal for options trading as well.

[AdamA]

Adam,

How are your LEAPs doing so far after today (Monday, 8/8/11)? 

25.5% since 1 Aug.

[AdamA]

I suppose with options that are "in the money", yet some weeks out from exercise date, it may be wise to employ a strategy of selling some percentage, say 30%, or selling enough to cover your costs, then keeping the remainder, or setting a stop loss on the rest to protect your winnings.

If you're a math geek there is a lot of potential to maximize profit by timing your exit appropriately, and exiting in stages.

Storm--

At the risk of sound paternalistic, keep in mind that options trading is hard.  You don't just have to be right about direction.  You have to be right about direction and timing. 

In the end, I have a feeling that these strategies you and I are discussing will turn out to be highly volatile, and will probably not yield much more than the good ol' PP in the end...maybe even less after taxes and commissions. 

Having said that, it is a lot of fun...

[Storm]

At the risk of sound paternalistic, keep in mind that options trading is hard.  You don't just have to be right about direction.  You have to be right about direction and timing. 

In the end, I have a feeling that these strategies you and I are discussing will turn out to be highly volatile, and will probably not yield much more than the good ol' PP in the end...maybe even less after taxes and commissions. 

Having said that, it is a lot of fun...

I'm with you there - any one of us I'm sure would love to sell the options now and pocket the cool 25% in 1 week return.  Of course if you did that you'd probably leave money on the table - or maybe not.

I was trying to make a system out of it (similar to the PP) where you could take market timing out of the equation, by treating it like an "options" ladder, although you are completely correct in that timing is difficult and may not be able to be made into a system.