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If you plan to buy and hold an index ETF for several months, better to sell a LEAP?
- Thread starter crgarcia
- Start date
Yes, and you will earn interest on your cash too. But keep in mind the liquidity might be a little problem. If I wanted to violate one of my major rules (never add to a losing position) I would sell some DITM puts, leaps on the XLF.
That is certainly true, but I think the OP wanted a synthetic "buy and hold". Another thing about the strategy vs just buying the ETF, is that you can easily leverage 2X if you choose to do so, without incurring margin interest.
Quote from crgarcia:
A put LEAP, as you are long?
This way you would profit from time decay, as well as the index rally.
There is a downside though, your profit on the upside is limited to the premium you collect. So if the underlying rallies more, you lose out on the extra gains.
If you want to mitigate this by selling deeper ITM puts, then the extrinsic time value you're hoping to make will get less and less.
If you plan to roll it month to month to take advantage of the greater time decay, things get complicated when you need to choose which strike to sell. And if you're at risk of getting exercised, then you either need to roll (which adds even more complexities) or to just be assigned the ETF.
I'm sure there's a smart way to do it, but it's not that straightforward.
Quote from hlpsg:
There is a downside though, your profit on the upside is limited to the premium you collect. So if the underlying rallies more, you lose out on the extra gains.
If you want to mitigate this by selling deeper ITM puts, then the extrinsic time value you're hoping to make will get less and less.
If you plan to roll it month to month to take advantage of the greater time decay, things get complicated when you need to choose which strike to sell. And if you're at risk of getting exercised, then you either need to roll (which adds even more complexities) or to just be assigned the ETF.
I'm sure there's a smart way to do it, but it's not that straightforward.
Yes, there is a smarter way of doing things and it's called -
Stop trying to be so clever because it WILL cost you.
So if you think the market is going up over the next several months, keep it real simple, forget about options and just buy and hold the ETF.
Quote from AK100:
Yes, there is a smarter way of doing things and it's called -
Stop trying to be so clever because it WILL cost you.
So if you think the market is going up over the next several months, keep it real simple, forget about options and just buy and hold the ETF.
True, there is nothing such as free lunch in options. If you gain something, you lose something else. When you sell ITM/DITM puts, you get additional revenue. In return you are taking a cap on your upside. If you chose a strike such that the probability of the underlying going past the strike is low, you may be able to sell the put options more number of times (each time adjusting the strike based on current underlyings price and volatility) before the underlying goes past the strike you chose.