LEAP Strike Selection

D

deltahedge

Hey Everyone,

I'm wondering if there exists a certain way to assess the best strike to select when purchasing 1.5-2 year out LEAP contracts and using the options for pure leverage and max return?

Of course if I take any arbitrary dollar amount (i.e. $10K) and say how many contracts can I purchase with them and then see where I think the underlying will be trading by expiration day I can generate which would be the best strike to select.

However, I'm more curious if there is a superior methodology to see what would be a better strike to select prior to expiration? While I could possibly model the theoretical prices by making an educated guess about future IV levels and then see which option would be the most profitable it seems a little too intensive. My real concern with using OTM leaps is that gamma on those suckers is minimal at best, making it critical to properly assess what delta to purchase. Granted, if someone thinks the stock is doubling by expiration one has to think "screw gamma" I will be proven right.

Thanks :)

P.S. Any ideas how to mitigate the impact of vega on LEAPs? Those IV changes REALLY affect the price of the OTM LEAPs (in the interim) and I'm wondering if I can somehow control such an impact?
 
Quote from deltahedge:

I'm wondering if there exists a certain way to assess the best strike to select when purchasing 1.5-2 year out LEAP contracts and using the options for pure leverage and max return?

Been years since I played with it but programs like Optionvue ask two questions when assessing the best option to buy.

1) What's the price move?
2) In what time frame?

Answer that and you have your ideal position.


Any ideas how to mitigate the impact of vega on LEAPs? Those IV changes REALLY affect the price of the OTM LEAPs (in the interim) and I'm wondering if I can somehow control such an impact?

Sell some volatility
More...
 
Quote from spindr0:

Quote from deltahedge:

I'm wondering if there exists a certain way to assess the best strike to select when purchasing 1.5-2 year out LEAP contracts and using the options for pure leverage and max return?

Been years since I played with it but programs like Optionvue ask two questions when assessing the best option to buy.

1) What's the price move?
2) In what time frame?

Answer that and you have your ideal position.


Any ideas how to mitigate the impact of vega on LEAPs? Those IV changes REALLY affect the price of the OTM LEAPs (in the interim) and I'm wondering if I can somehow control such an impact?

Sell some volatility
More...

Here's my problem though spindr0, I have no idea when the market will realize the VALUE in the underlying? I do know it will be within some point the lifetime of the LEAP but large uncertainty looms over as to when that event would take place?

Regarding the sell vol part, yeah I could do some bull put spreads but do I want to really get doubly bullish? On the flipside I could do some OTM near month bear call spreads but then I may be burning the candle on both ends especially if the stock pops...

On another note I do own Optionvue 6, where is that feature where it tells me what's the best option to buy given my outlook?
 
Quote from deltahedge:

Here's my problem though spindr0, I have no idea when the market will realize the VALUE in the underlying? I do know it will be within some point the lifetime of the LEAP but large uncertainty looms over as to when that event would take place?

Might it be a good idea to hold off taking a directional position until there's less than large uncertainty when that event will occur?

Regarding the sell vol part, yeah I could do some bull put spreads but do I want to really get doubly bullish? On the flipside I could do some OTM near month bear call spreads but then I may be burning the candle on both ends especially if the stock pops...

There's always a "Yeh but" with options. If you do verticals and the UL moves up nicely, you make less. If you don't sell the short leg and it drops/goes nowhere, your long calls lose more. If IV contracts, your long calls suffer. If you do verticals, IV change affects you less. It's all about choices and you pick your posion.

On another note I do own Optionvue 6, where is that feature where it tells me what's the best option to buy given my outlook?

I don't know. It has been many years since I played with it and I don't know what it currently offers. It used to have a faeture where you inputted the price target, dollar investment, etc. and it indicated how many of what option was the best position. Perhaps now it's too sophisticated for that :)
More...
 
Quote from deltahedge:

On another note I do own Optionvue 6, where is that feature where it tells me what's the best option to buy given my outlook?
More...
Trade Finder > Targets tab.
 
Quote from deltahedge:

Any ideas how to mitigate the impact of vega on LEAPs? Those IV changes REALLY affect the price of the OTM LEAPs (in the interim) and I'm wondering if I can somehow control such an impact?
More...

Overcoming the vega risk is difficult with long-dated options at any strike other than deeply ITM, unless you're at a generational low in IV. Presuming a long delta bias, pedestrian high delta calls are the safest but might not give you the leverage you need when you compare simply trading the underlying.
 
Quote from sonoma:

Overcoming the vega risk is difficult with long-dated options at any strike other than deeply ITM, unless you're at a generational low in IV. Presuming a long delta bias, pedestrian high delta calls are the safest but might not give you the leverage you need when you compare simply trading the underlying.
More...

Agreed, at some point one must truly weigh the benefits and drawbacks of simply purchasing the underlying as opposed to buying OTM LEAP options with their vega risk but increased leverage vis a vis deep ITM options or the actual underlying.
 
Quote from spindr0:

Here's my problem though spindr0, I have no idea when the market will realize the VALUE in the underlying? I do know it will be within some point the lifetime of the LEAP but large uncertainty looms over as to when that event would take place?

Might it be a good idea to hold off taking a directional position until there's less than large uncertainty when that event will occur?

Regarding the sell vol part, yeah I could do some bull put spreads but do I want to really get doubly bullish? On the flipside I could do some OTM near month bear call spreads but then I may be burning the candle on both ends especially if the stock pops...

There's always a "Yeh but" with options. If you do verticals and the UL moves up nicely, you make less. If you don't sell the short leg and it drops/goes nowhere, your long calls lose more. If IV contracts, your long calls suffer. If you do verticals, IV change affects you less. It's all about choices and you pick your posion.

On another note I do own Optionvue 6, where is that feature where it tells me what's the best option to buy given my outlook?

I don't know. It has been many years since I played with it and I don't know what it currently offers. It used to have a faeture where you inputted the price target, dollar investment, etc. and it indicated how many of what option was the best position. Perhaps now it's too sophisticated for that :)

More...

Just wanted to thank you for offering your insight :)
 
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