LEAPS PP

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Re: LEAPS PP

Post by Gosso » Fri Apr 20, 2012 3:17 pm

If I ever decide to buy options, then I'd likely use a Bull Call Spread.  What this does is limit your upside to a 10-20% gain in the underlying stock, and for this sacrifice you are given back about 20% of your initial investment.  This seems to be perfect for the PP's moderately volatile assets.  Another benefit is that it takes greed off the table since once the stock moves 10-20% then you can no longer profit from it, so you might as well rebalance and take your profits off the table.

The downside is the additional transaction costs, and inability to profit from a massive move...although you can simply purchase a new Bull Spread once the previous one reaches the cap, but again the transaction costs hurt.

Think of it as a forced rebalancing, but still pays back ~20% (Edit: of your original investment) even if the stock falls below your strike price.  An 80% loss is better than 100%.

I don't believe that this hurts the leverage, although I could be wrong.

***

Something else I was thinking about is buying call options with equal premium prices, instead of all ATM.  For example, lets say we want to buy Dec 21, 2012 call options for TLT GLD SPY all at $10.  This means we'd have to go moderately ITM for TLT, slightly ITM for SPY, and ATM for GLD.  Does this give a more appropriate risk and leverage profile?  Since TLT is historically less volatile, it would make sense to buy moderately ITM, since it is more likely to remain flat.

Or does it not make a difference?
Last edited by Gosso on Sat Apr 21, 2012 1:32 pm, edited 1 time in total.
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Re: LEAPS PP

Post by Storm » Fri Apr 20, 2012 3:43 pm

Gosso wrote: I was looking at the Dec 22, 2012 call options and noticed that a few were overpriced in comparison to the Black–Scholes model:

- SPY: +48%
- GLD: +24%
- TLT: -1%

Does this mean that the options on SPY and GLD have already factored in a significant price increase?  Then if there was a price increase, is it possible the call options would actually decrease in value?

I'm beginning to like this scenario less and less.

Any expert option traders want to throw in their two cents on this?  Is it normal for GLD and SPY to be overpriced like this?
Gosso, I'm about as novice of an options trader as they come, but I think you're correct.  It seems like the futures price tends to be what most market participants believe is going to happen: they think gold and stocks will rise by December, so the consensus is already priced in.

The reason I would caution you to not use our previous test data (especially the $20K to $32K increase) is that we made those options bets a month or so before the debt ceiling deadline last summer.  The market had already priced in what they thought was going to happen, which, according to general consensus, was that treasury yields were going to soar and all of that outflow from the bond selloff was going to rush into equities.  As we all know, the exact opposite happened.  Treasury yields fell and this made our TLT options soar in value.

You can make a lot of money when the market is wrong, but if you bet money now that gold is going to $2000 an ounce, don't be too surprised if it does, and you still don't make a lot of money, because the market has already priced that consensus view in.

Good luck.
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Re: LEAPS PP

Post by MachineGhost » Sat Apr 21, 2012 8:17 am

Storm wrote: Basically, I'm just holding these options until January of next year and hoping there is a big move in gold or equities due to QE3.  If things stay relatively flat I've lost money.
Time decay and volatility collapse will get you every time.  There is no way to do options succesfully without factoring those two variables into it.  Options aren't straight up substitutes for the underlying, like stock futures.  Even though 100 shares of stock, 1 ATM option and 1 ATM stock futures are all equivalent in terms of $ gain.

MG
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Re: LEAPS PP

Post by AdamA » Sun Jul 29, 2012 11:25 pm

AdamA 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).

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.

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.
Last edited by AdamA on Sun Jul 29, 2012 11:42 pm, edited 1 time in total.
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Re: LEAPS PP

Post by Storm » Mon Jul 30, 2012 8:35 am

AdamA wrote:
AdamA 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).

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.

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.


My actual LEAPS purchased after the debt ceiling showdown of last year have been negative for most of the year.  Just recently they have started to push into almost break-even territory (around $9600 out of $10,000).  I'm on track to sell them in October, so if there are no major market moves until then, it's highly likely I'll take a small loss, or a small profit.

If you try this strategy, you run the very real risk that the PP is mostly flat during your short term time horizon, and that pretty much sucks for options.

AdamA, if only we'd put real money on those "fake trades"...  By the way, I think this is what Harry Browne talks about in his books.  He says something like "the best winning trading strategy will lose money when you try it."
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Re: LEAPS PP

Post by Gosso » Mon Jul 30, 2012 10:19 am

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...
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Re: LEAPS PP

Post by clacy » Mon Jul 30, 2012 11:34 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...
I would assume most who are trading options on long bonds are trading futures options on the 30-yr bond future instead.
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Re: LEAPS PP

Post by AdamA » Tue Jul 31, 2012 12:58 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...
As the options get closer to expiration, the spread closes. 
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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 Gosso » Wed Aug 01, 2012 12:27 pm

MangoMan 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 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.
MangoMan 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

MangoMan 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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Re: LEAPS PP

Post by MachineGhost » Tue Oct 23, 2012 3:09 am

Storm wrote: 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.
Rule #1: Don't hold LEAPs at or below 6-months to expiration.
Rule #2: Don't forget Rule #1.

See if you can sell a Jan 13 call against it and achieve positive theta.
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Re: LEAPS PP

Post by Storm » Tue Oct 23, 2012 7:05 am

AdamA wrote: I'd sell and rebuy similar options with later expiration dates...
I like this idea - how far out would you buy?  I think I would buy a 50/50 SPY/TLT split this time as well (and then sit in awe as GLD surely jumps... lol).
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Re: LEAPS PP

Post by AdamA » Tue Oct 23, 2012 9:08 am

Storm wrote:
AdamA wrote: I'd sell and rebuy similar options with later expiration dates...
I like this idea - how far out would you buy?  I think I would buy a 50/50 SPY/TLT split this time as well (and then sit in awe as GLD surely jumps... lol).
This to me is just like making complicated bets at a craps table.  i.e., you're still probably going to lose.

Why not just take the relatively small loss before time decay really starts to eat up your positions?  
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Re: LEAPS PP

Post by Storm » Fri Jan 04, 2013 9:30 am

This is an embarrassing chapter for my investing experience.  I ended up with a >25% loss on these positions.  Variable Portfolios teach humility, that is for sure.

My suggestion to you - don't use options-based PP.  Personally I won't do this in the future.  Perhaps losing this small amount of money (relatively speaking, a few thousand dollars still seems like a lot of money to me!) will teach me to stay humble and keep all of my money in the PP, rather than gambling with some of it.
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Re: LEAPS PP

Post by AdamA » Sat Jan 05, 2013 1:40 pm

Storm wrote: This is an embarrassing chapter for my investing experience.  I ended up with a >25% loss on these positions.  Variable Portfolios teach humility, that is for sure.

My suggestion to you - don't use options-based PP.  Personally I won't do this in the future.  Perhaps losing this small amount of money (relatively speaking, a few thousand dollars still seems like a lot of money to me!) will teach me to stay humble and keep all of my money in the PP, rather than gambling with some of it.
Honestly, 25% doesn't seem like that big of a loss for an options based portfolio (I'd expect a lot of volatility). 

What was your exact strategy again?

Just curious.
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Re: LEAPS PP

Post by Storm » Sat Jan 05, 2013 6:11 pm

AdamA wrote:
Storm wrote: This is an embarrassing chapter for my investing experience.  I ended up with a >25% loss on these positions.  Variable Portfolios teach humility, that is for sure.

My suggestion to you - don't use options-based PP.  Personally I won't do this in the future.  Perhaps losing this small amount of money (relatively speaking, a few thousand dollars still seems like a lot of money to me!) will teach me to stay humble and keep all of my money in the PP, rather than gambling with some of it.
Honestly, 25% doesn't seem like that big of a loss for an options based portfolio (I'd expect a lot of volatility). 

What was your exact strategy again?

Just curious.
I bought at the money call options about 16 months to maturity.  1/3rd each of SPY, TLT, and GLD.  My SPY options ended up making about 100% profit, while the other two made about 80% losses.  The idea was to keep them at least 1 year so that any gains would be long term.
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AdamA
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Re: LEAPS PP

Post by AdamA » Sat Jan 05, 2013 6:39 pm

Storm wrote:
AdamA wrote:
Storm wrote: This is an embarrassing chapter for my investing experience.  I ended up with a >25% loss on these positions.  Variable Portfolios teach humility, that is for sure.

My suggestion to you - don't use options-based PP.  Personally I won't do this in the future.  Perhaps losing this small amount of money (relatively speaking, a few thousand dollars still seems like a lot of money to me!) will teach me to stay humble and keep all of my money in the PP, rather than gambling with some of it.
Honestly, 25% doesn't seem like that big of a loss for an options based portfolio (I'd expect a lot of volatility). 

What was your exact strategy again?

Just curious.
I bought at the money call options about 16 months to maturity.  1/3rd each of SPY, TLT, and GLD.  My SPY options ended up making about 100% profit, while the other two made about 80% losses.  The idea was to keep them at least 1 year so that any gains would be long term.
How close to expiration did you sell them?
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