Owning stock vs LEAP diagonals

K

KohPhiPhi

Let's assume the following profile:
  • Retiree looking to yield his lifelong savings capital.
  • Steady income and fighting inflation for an average 10% yearly return would be preferred over sheer capital growth and, potentially, large volatility.
  • Does not mind to actively manage the portfolio, but must be able to sleep well at night without having to be glued to the computer every single day.

So, assuming such premise, I've been trying to analyze the pros and cons of the 2 following scenarios:
  • Owning a portfolio of blue chip dividend stocks with a long-term bullish outlook, and managing them via options:
    • Writing monthly cash secured puts to buy into the stock position
    • Buying protective puts (possibly 3 or 6 months to expiration) to hedge risk
    • Writing monthly covered calls to reduce cost
    • Collecting dividends along the way
    • Rolling and managing the protective puts and the covered calls as needed for as long as the bullish bias remains intact on the underlying stocks.
Versus...
  • Going the synthetic route with LEAP diagonals, also on similarly long-term bullish underlying stocks:
    • Buying one-year-to-expiration ITM call LEAPs
    • Selling OTM monthly calls to reduce cost
    • Rolling as needed to avoid assignment as much as possible
    • Redoing the call LEAP about 2 months from expiration before Theta acceleration kicks in.

Both methods are very similar in their nature and risk profiles. However, owning the stock provides dividends, whereas the LEAP diagonal, being far less capital intensive, provides leverage.

What would be the best course of action for the proposed trader profile?
 
All these ideas work fine in a raging 10+ year bull market. And if it continues with fast duration drops and bear markets that recover quickly. Survivorship bias also comes into play strongly when you look back how it might have worked the past 25 years or so. Quite a few stocks are long gone. The idea that "Hey, this would have been a good strategy over the years" may not be true if, 25 years ago, your "solid stocks that would never go under" put some bad hits on your portfolio. Stocks that no longer show up in your data.

A quote that is over used but true "Everybody has a plan, until they get punched in the mouth" comes into play here. What puts to buy for protection and what duration, and don't forget that Stock + Put = Call. And of course with large drops on stocks you no longer "would like to buy..." means you are stuck with losses. Selling covered calls on stocks that have dropped a great deal will likely lock in losses if the strikes are below your basis. Premium drops off fast if the call strikes are way OTM.

What can be done? Buy real estate, maybe some bit coin. Probably some precious metals (they will at least always have SOME value). And keep some stock. Don't mess with it much. CCs tend to keep you in bad stocks and make it hard to quickly recover losses. On large drops, you are scrambling to write and roll the calls if the stock moves back up quickly. You are tempted to let it go on assignment, only to see it move up much further. Option replacement strategies need a certain amount of trading skill and attention. I'd rather go fishing.

Sorry for the ramble. Carry on. :)
 
KohPhiPhi said:
However, owning the stock provides dividends, whereas the LEAP diagonal, being far less capital intensive, provides leverage.
More...
While the stock pays dividends outright, the calls will be cheapened by the sum of the dividends to expiration. Unless you are looking at some special cases, options and underlying are roughly equivalent in terms of dividends. If anything, there might be some positive tax considerations to owning really long-dated calls on dividend-paying stocks.

I can't give you a sensible advice, but I think your primary considerations should be, in order,
(a) reducing your transaction and carry costs
(b) protecting yourself against catastrophic declines
(b) increasing your leverage
 
KohPhiPhi said:
Let's assume the following profile:
  • Retiree looking to yield his lifelong savings capital.
  • Steady income and fighting inflation for an average 10% yearly return would be preferred over sheer capital growth and, potentially, large volatility.
  • Does not mind to actively manage the portfolio, but must be able to sleep well at night without having to be glued to the computer every single day.

So, assuming such premise, I've been trying to analyze the pros and cons of the 2 following scenarios:
  • Owning a portfolio of blue chip dividend stocks with a long-term bullish outlook, and managing them via options:
    • Writing monthly cash secured puts to buy into the stock position
    • Buying protective puts (possibly 3 or 6 months to expiration) to hedge risk
    • Writing monthly covered calls to reduce cost
    • Collecting dividends along the way
    • Rolling and managing the protective puts and the covered calls as needed for as long as the bullish bias remains intact on the underlying stocks.
Versus...
  • Going the synthetic route with LEAP diagonals, also on similarly long-term bullish underlying stocks:
    • Buying one-year-to-expiration ITM call LEAPs
    • Selling OTM monthly calls to reduce cost
    • Rolling as needed to avoid assignment as much as possible
    • Redoing the call LEAP about 2 months from expiration before Theta acceleration kicks in.

Both methods are very similar in their nature and risk profiles. However, owning the stock provides dividends, whereas the LEAP diagonal, being far less capital intensive, provides leverage.

What would be the best course of action for the proposed trader profile?
More...
%%
Sounds good;
except for the put part
And since SPY long term average is12%;
could risk 2% of profit on options.
10% then could be a good goal. QQQ tends to do much better but more vol.....
 
You must log in or register to reply here.
Back
Top