Considering either buying in the money LEAP to act as proxy instead of buying SPY. Also considering buying slightly out of money, so delta about 0.5, rolling if necessary, with hope of eventual significant profit. Anyone with experience or feedback to offer? Thanks.
SPY Call LEAPS
- Thread starter Kwai Chang Caine
- Start date
This is the way I would go if you are doing size. If you are trying to mimic long stock/index, you can also buy an atm call and sell an atm put which will be equivalent to 100 shares of SPY give or take. You can manipulate the strikes on the call/puts to create whatever position you want.
The extrinsic price of the option is near a maximum at the money, so you will basically "loose" that amount, and bet the price upward movement will more that offset that amount in your time window (your headwind is the Extrinsic value of the option being purchased). I trend-traded some ETF's in the past with a similar mechanism, but used shorter duration options (70 days to 120 days to expiration), and entered with the 60-70 delta strike, and rolled them when DTE got to 20 DTE or the position delta increased into the upper 80's. The roll based on Delta, may not be of interest, as this was a mechanism for capturing gains, which may not be part of your game-plan. I do like the idea by 1245 of using SPX instead of SPY for the tax treatment and commission minimization.
The critical point is you must be correct with the price trend and timeframe.
The critical point is you must be correct with the price trend and timeframe.
If you wish to use option as a proxy, you want to aim for contract with a delta as close to 1 as possible. The further away, the less it mimics SPY. Delta 1 means no time premium (pure leverage).
Buying OTM options will realize profit only if the underlying moves by the amount the strike exceeds the market price at time of purchase *AND* the cost of the option. Which could mean you are hoping for a 5% gain in market value *AND* 5% gain to compensate price of option. Which means it will work against you (you need it to rise 10% in order to generate 5%)
Rolling is a valid strategy if you want to ensure you keep the contract and do not realize a loss or get assigned. However, rolling is not free -- You either pay more for the roll, set the strike price to be more unfavourable, or set the expiration date to be more unfavourable.
From what you are suggesting, going deep and having leverage is a valid strategy for stock replacement. OTM is more of a speculative bet.
Note: You will of course not realize dividends wen you hold only the options. So you should factor in a loss of about 2-2.5% (the dividends you would have realized).