Pros and Cons for using options as a direct substitute for the underlying?

The material is not overly complex some people like myself and a few others have spent a long time in the business of options trading and are generally pretty agreeable to help out. On the other hand there are a lot of people who dont have much expereince and knowledge but try to claim they do and make a mockery of the place.


Good luck to you glad I could help.
 
Quote from SteveGoTex:

I am not just going long on a LEAP, and doing nothing else. I am buying a LEAP and taking the money I would have used to buy the underlying out of play (into a risk free cash equivalent).

That is what I explained initially on this thread. I agree that to throw big parts of your investment capital into long option positions is not good trading or investing.

Here is what I did recently:

Bought Dec 31 QQQQ 36 Call in June.
Paid $5.22 per contract. That was ATM.

That makes break even on Dec 31, 2010 at $41.22.

Took the other $3,078 I would have spent to buy the underlying and put it into an FDIC CD at 2.00%

For every $1 above $41.22 in QQQQ on Dec 31, 2010, I make $100.00.

If I am wrong, I am out $522, and still have the $3,078.00 plus interest.
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Yeh, it is a dead horse :)

The John Summa article that Tom1am posted pretty much sums it up. The LEAP is a lower cost surrogate and has a smaller loss potential if there's a big drop. It underperforms the underlying to the upside due to the time premium paid (comparing $$ gain on 1 LEAP vs 100 shares not ROI). Implied volatility and interest rate changes will affect its value.

The LEAP is a derivative and on an expiration basis, it will behave like the underlying above the strike, dollar for dollar. The difference b/t their break even points and profit potential is due to the premium paid. The carry cost is built in to the call premium so the risk free cash investment is an offset. Below the strike, the loss is a function of time decay and the size of the drop.

It's really not very complicated
 
SteveGoTex & OddTrader


One of the things missing from your trades/questions is the goal associated with the trade, as that can make a huge difference. Once you frame the question as a % goal versus risk, you can make a better comparison.

You cannot compare spending $3000 for 100 shrs of Q's with spending $300 for a LEAP because it is not only the raw capital that is relevant but also the relative risk.

In general, I have found it easier to manage risk with stock because of the large bid/ask spreads in the LEAPS and changes due to volatility throw the LEAPS around even if the underlying remains fairly static. Also, unless you go really far out, decay comes into play.

At the same time, I have been reasonably successful at selling covered calls against LEAPS versus stock, since the capital against which to sell CC's is significantly lower. So I find LEAPS for such a purpose better.

At the end, it all depends on your goal.
 
Or you can use a small margin to sell a DITM leap puts and put of rest of money to buy CD.

The key is small margin, don't be too greedy, otherwise you will lose both.
 
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