More on leaps

S

shMark

I just wrapped up my third book on buying LEAPS, and this one brings a fresh perspective. The author suggests allocating 20% of your portfolio to an at-the-money (ATM) LEAP on SPY, with the remaining 80% invested directly in SPY shares. The entry signal he recommends is quite specific: buy in when SPY closes above its 200-day simple moving average (SMA) for 5 out of 10 trading days. Conversely, you should buy a put LEAP on SPY when it finishes below the 200-day SMA for 5 out of 10 trading days. He's tested this strategy extensively, starting from early 2007 until the book was written, and it has significantly outperformed the S&P 500.

My concern with the strategy lies in its use of ATM options, which are prone to substantial time value decay. If you opt for deep-in-the-money (DITM) options instead, you can often find options that carry only about 5% to 10% time value, making them a more cost-effective choice in terms of decay.
 
Have you ran any backtests??
Your assumption is obviously correct.

I haven't looked at an 80/20 allocation. Not a huge fan of ATM options as a bullish play,and not so sure that the. 20 invested in ATM calls provides significant outperformance despite the leverage. Im ball parking 10% of spot for the ATM..

Have you checked out Orats?



shMark said:
I just wrapped up my third book on buying LEAPS, and this one brings a fresh perspective. The author suggests allocating 20% of your portfolio to an at-the-money (ATM) LEAP on SPY, with the remaining 80% invested directly in SPY shares. The entry signal he recommends is quite specific: buy in when SPY closes above its 200-day simple moving average (SMA) for 5 out of 10 trading days. Conversely, you should buy a put LEAP on SPY when it finishes below the 200-day SMA for 5 out of 10 trading days. He's tested this strategy extensively, starting from early 2007 until the book was written, and it has significantly outperformed the S&P 500.

My concern with the strategy lies in its use of ATM options, which are prone to substantial time value decay. If you opt for deep-in-the-money (DITM) options instead, you can often find options that carry only about 5% to 10% time value, making them a more cost-effective choice in terms of decay.
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Hes using the 20% for leverage and buying apx 2 ATM's as opposed to one really deep ITM...Think 1x2 backspread
I eyeballed the SPY reurns since 94,and there were only 6 flat-ish years where you would have really regretted buying the options..

Hes going long some vol and it appears the market moved enough to make it a profitable tradeoff




shMark said:
No. I relied on his backtests. Is orats free? It seems DITM leaps are a much better strategy?
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I'm not going to speak about the strategy...That's your call.

As I have posted here before, I will do leaps just out of the money (stocks or EFTs).

If a company has a bad quarter (and the market slams it), I will buy (usually 100 shares) then do a leap on the company. It has to be an industry leader. I don't go heavy into the company because it may not be a "one off", but something that is very wrong with the company (think Hertz).

For many of my investments I have moved away from leaps. It is a small portion of my trades. I am concerned with super inflation. I feel if inflation comes roaring back, the price of stocks may rise. They could rise from more dollars in the market and not because of any good earnings or market share growth of the company. That is why I would rather be holding the solid company (with good market share). I am starting to do more options (covered calls) way out of the money for basic cash flow. If it is close to getting called away, I may choose to buy it back a few days from expiration, on the cheap.

So if you could share your thought process of what might happen if inflation rises above say 20%?

What happens to your strategy then...
 
I tested similar strategies myself, also on qqq and individual stocks. Surprisingly, atm leaps yielded indeed better results then eg 5 or 10% otm leaps. Itm leaps are imo a bit prone the downside. So an index or something like smh works better then individual stocks (gaps)

Don’t you think the 5 day rule is bit overfitting btw?
 
Not suprising at all in a bull market..To be expected. One important factor that is often overlooked is one should compare delta equivalent or equal dollar positions,not 1 ATM option vs One 30 delta option..

I do think there may have been some curve fitting going on,but the authors approach is interesting



Zwaen said:
I tested similar strategies myself, also on qqq and individual stocks. Surprisingly, atm leaps yielded indeed better results then eg 5 or 10% otm leaps. Itm leaps are imo a bit prone the downside. So an index or something like smh works better then individual stocks (gaps)

Don’t you think the 5 day rule is bit overfitting btw?
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taowave said:
Not suprising at all in a bull market..To be expected. One important factor that is often overlooked is one should compare delta equivalent or equal dollar positions,not 1 ATM option vs One 30 delta option..

I do think there may have been some curve fitting going on,but the authors approach is interesting
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I used price normalisation, otherwise it wouldn’t be comparable indeed.
Results were compared with buy/hold to mitigate the bull market effect to some extend. Offcourse, in a longterm sideways /slightly bearish decade this would fall apart
 
I was suprised to see that flat-ish market were definetly not the norm..



Zwaen said:
I used price normalisation, otherwise it wouldn’t be comparable indeed.
Results were compared with buy/hold to mitigate the bull market effect to some extend. Offcourse, in a longterm sideways /slightly bearish decade this would fall apart
More...
 
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