Dollar Cost Averaging and a LEAP

I

I'mbatman

Hello,

I am in a situation where I have a large amount of cash to invest. I have always had the most success in my investing life with simply dollar cost averaging into index funds. I have a slight variation where I put some additional funds in if the market drops say 10% or greater.

I plan to do the same with this money over a period of 18 months except with an Index ETF.

The problem though, is the potential for missing out on market appreciation by wading into the market as opposed to doing a lump sum.

I'm considering buying an ITM LEAPS contract that would equal the value of a lump sum initially to protect the risk of missing out on appreciation, while dollar cost averaging the remainder over the 18 month window I'm planning.

The cost of the LEAPS contract is roughly 6% of the total value of my funds available.

I am solely considering this tactic to preserve the benefit of the market going up as opposed to wading in slowly over 18 months. If the market goes down, I will be DCA'ing a greater amount each month.

I understand the option can expire worthless and what my risk is in that department.

Any thoughts?
 
I agree about investing in index fund, but not at these levels, do something else until we are in the presence of a depressed/bear market; then you may begin.
 
Quote from I'mbatman:

Hello,

I am in a situation where I have a large amount of cash to invest. I have always had the most success in my investing life with simply dollar cost averaging into index funds. I have a slight variation where I put some additional funds in if the market drops say 10% or greater.

I plan to do the same with this money over a period of 18 months except with an Index ETF.

The problem though, is the potential for missing out on market appreciation by wading into the market as opposed to doing a lump sum.

I'm considering buying an ITM LEAPS contract that would equal the value of a lump sum initially to protect the risk of missing out on appreciation, while dollar cost averaging the remainder over the 18 month window I'm planning.

The cost of the LEAPS contract is roughly 6% of the total value of my funds available.

I am solely considering this tactic to preserve the benefit of the market going up as opposed to wading in slowly over 18 months. If the market goes down, I will be DCA'ing a greater amount each month.

I understand the option can expire worthless and what my risk is in that department.

Any thoughts?
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Not a horrible strategy. Remember, you will receive no dividends on the options. You might want to consider a call spread instead. Buy your ITM call and sell a call OTM call far enough out to cover the most you feel the market can go up during that time.

1245
 
Quote from 1245:

Not a horrible strategy. Remember, you will receive no dividends on the options. You might want to consider a call spread instead. Buy your ITM call and sell a call OTM call far enough out to cover the most you feel the market can go up during that time.

1245
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Just an fyi here, the dividends are priced into the calls. No need for any call spread.
 
Now we have about 4 years bull market. So DCA over the next 18 months still can be very expensive if the maket turns down. Consider DCA for at least 3 years and don't waist money on leaps.
 
Quote from Maverick74:

Just an fyi here, the dividends are priced into the calls. No need for any call spread.
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My mistake in the way I worded it. I know the dividends are priced in, but he still receives no income if the market is down or sideways, as he would if he were long the underlying. He would also have time decay. So I was suggesting a call spread would likely produce a higher return vs just long the ITM call.

1245
 
Quote from Trader.Fighter:

I agree about investing in index fund, but not at these levels, do something else until we are in the presence of a depressed/bear market; then you may begin.
More...

I've been saying that since 1350. A lot of good it's done me.
 
Quote from 1245:

My mistake in the way I worded it. I know the dividends are priced in, but he still receives no income if the market is down or sideways, as he would if he were long the underlying. He would also have time decay. So I was suggesting a call spread would likely produce a higher return vs just long the ITM call.

1245
More...

A DITM leap will have zero decay incrementally. True he receives no income but he is buying the leap at a forward discounted value, that is the same thing as income. Even better, he doesn't get taxed on this discount.
 
Quote from trickyname:

I've been saying that since 1350. A lot of good it's done me.
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This is my reason for wanting to buy the LEAPS. I do not want to miss out on the market moving up while I slowly wade in. If the market moves down, I'm DCA'ing in a better prices, but my LEAP loses value. If the market moves up, my LEAPS gain value and I DCA in at higher prices.

If I simply wait for a large market correction, I may not get one and miss a huge run. I feel the LEAP with DCA'ing removes the timing element.
 
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