hedging with leaps

H

happy trading

can someone tell me the drawbacks to the following very elementary strategy.
buy 100 shares of apple. buy atm or a little otm put with far out expiration, for example the january 2023 130 put which is trading for around 20 (which is really 2 grand) dollars. and sell weekly or whatever you choose, otm calls for just 20 cents( which is really 20 dollars) to cover the cost of the put. and if apple really collapses then either i escape with a max 15 percent loss, or i can roll down the option and buy many more shares.
yes i know that if apple sky rockets then i will be left in the dust. so, either this is the trade off i will have to take to insure myself, or i can buy a very cheap otm call evey week to convert it into a weekly credit spread.
 
happy trading said:
can someone tell me the drawbacks to the following very elementary strategy.
buy 100 shares of apple. buy atm or a little otm put with far out expiration, for example the january 2023 130 put which is trading for around 20 (which is really 2 grand) dollars. and sell weekly or whatever you choose, otm calls for just 20 cents( which is really 20 dollars) to cover the cost of the put. and if apple really collapses then either i escape with a max 15 percent loss, or i can roll down the option and buy many more shares.
yes i know that if apple sky rockets then i will be left in the dust. so, either this is the trade off i will have to take to insure myself, or i can buy a very cheap otm call evey week to convert it into a weekly credit spread.
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Hedging is tricky. If you bought the cheap otm calls then you would doubly lose if aapl just sat here.

I think hedging a long stock position is generally a losing idea except for in tactical situations.
 
newwurldmn said:
Hedging is tricky. If you bought the cheap otm calls then you would doubly lose if aapl just sat here.

I think hedging a long stock position is generally a losing idea except for in tactical situations.
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i think you misunderstood me. it could be i wass unclear.
the plan is to buy 100 shares of apple. then purchase a leaps put ( the spread on the put can't be to wide). i will then sell weekly calls in order to pay off the put. for example if i buy the january 2023 put with 130 strike it will cost 20 bucks. there is 92 weeks till that expiration so divide 20 by 92 which comes out to 21 cents. so i will try to average 21 cents every week by selling weekly calls. so even if apple sits flat for the year and a half i do not lose a penny. now, the final step (this is optional) is to simply protect myself from missing out if tomorrow apple jumps 10 percent, so i will buy a weekly call for a couple of cents. which i am really doing is selling a weekly credit spread to pay for the put.
any comments on this? if i misunderstood you please tell me.
 
What you are describing is a variation on a collar. The classic definition of a collar is long stock, long an OTM put and short an OTM call.

The premium collected from the call is sometimes enough to cover the cost of the put.

You limit your downside risk with the put. You limit your upside profit potential with the call.

You're experimenting with different expirations. But it still sounds like a collar strategy.

BMK
 
All you are doing is buying a 1/23 130 call and selling garbage against it..Are you ratioing the upside??

Is vol 1.5 years out exceed8ngly cheap,and if you can't answer that,you shouldn't be doing it


happy trading said:
can someone tell me the drawbacks to the following very elementary strategy.
buy 100 shares of apple. buy atm or a little otm put with far out expiration, for example the january 2023 130 put which is trading for around 20 (which is really 2 grand) dollars. and sell weekly or whatever you choose, otm calls for just 20 cents( which is really 20 dollars) to cover the cost of the put. and if apple really collapses then either i escape with a max 15 percent loss, or i can roll down the option and buy many more shares.
yes i know that if apple sky rockets then i will be left in the dust. so, either this is the trade off i will have to take to insure myself, or i can buy a very cheap otm call evey week to convert it into a weekly credit spread.
More...
 
happy trading said:
i know that if apple sky rockets then i will be left in the dust. so, either this is the trade off i will have to take to insure myself, or i can buy a very cheap otm call evey week
More...


If the stock goes way up before you have sold enough calls to cover the cost of the put...

You will probably have a net loss on the position. The last call you sold will be in the money, and get exercised. The profit on the stock may not be enough to absorb the cost of the put, leaving you with a substantial loss. Buying a cheap OTM call every week may not be sufficient to protect you from this outcome.
 
BMK said:
What you are describing is a variation on a collar. The classic definition of a collar is long stock, long an OTM put and short an OTM call.

The premium collected from the call is sometimes enough to cover the cost of the put.

You limit your downside risk with the put. You limit your upside profit potential with the call.

You're experimenting with different expirations. But it still sounds like a collar strategy.

BMK
More...
i have two replies to your comment.
1. that the market goes up gradually so even if the market goes up 4 percent, most weeks since i am selling weekly calls (assuming they expire worthless) i can sell another call. in other words my downside is set but my upside keeps on getting adjusted higher.
2. i will always be long a weekly call a couple of dollars higher then the one i am short so even if the market sky rockets tomorrow i will only not be there for the difference between the 2 weekly calls. so no my upside is not limited.
 
BMK said:
If the stock goes way up before you have sold enough calls to cover the cost of the put...

You will probably have a net loss on the position. The last call you sold will be in the money, and get exercised. The profit on the stock may not be enough to absorb the cost of the put, leaving you with a substantial loss. Buying a cheap OTM call every week may not be sufficient to protect you from this outcome.
More...
the leaps put have a delta of a drop less then 4. so if the stock goes up i am gaining twice as fast then i am losing.
 
taowave said:
All you are doing is buying a 1/23 130 call and selling garbage against it..Are you ratioing the upside??

Is vol 1.5 years out exceed8ngly cheap,and if you can't answer that,you shouldn't be doing it
More...
as i said i will always also be long a weekly call, albeit, farther otm.
 
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