Re: [ConservativeOptionStrategies] Re: Adjusting Your DITM Leap Put with Increasing Stock Price

 

joe, thanks for the reply and i agree with the general thought.  However, you do agree, dont you, that this strategy is functionally equivalent to your DLS strategy with Leap calls?   So we are truly back to evaluating whether or not the Leap call strategy is viable, and how viable it might be. I've read your paper and would agree that it is workable as long as markets return to their prior levels. Alternatively, it appears to work if you get enough volatility such that your new cost basis can be salvaged at a profit eventually.  The key is one of the tenets that you cover in the early portion of your paper: for the retiree needing consistent, current income, your approach really is a BETTER option than a Buy & Hold strategy which uses all of your capital.  Of course, when your paper was written, it was logical to assume that your free cash could get nearly 5% interest without risk.  That assumption no longer holds, and it affects the mathematics of everything else.   And in light of 2008, I surely do not know anyone who is still willing to invest with a Buy & Hold strategy, so a "less worse" alternative such as DLS is not compelling.   Nonetheless, I would still be willing to concede that your DLS strategy (of which this is the same approach using different flavor options)  is generally a better approach than Buy & Hold for the person who is willing to do the work and accept the more limited, but more consistent payout every month.   Regards, Dom       --- On Mon, 3/1/10, joe & leigh <gass20@aol.com> wrote: From: joe & leigh <gass20@aol.com> Subject: [ConservativeOptionStrategies] Re: Adjusting Your DITM Leap Put with Increasing Stock Price To: ConservativeOptionStrategies@yahoogroups.com Date: Monday, March 1, 2010, 1:38 PM   dom, if it drops to 50 i already know what my max loss is ...per example below my max risk is 8.7%.....your drop to 50 from 62.8 is a 20.4% drop. since my strategy is an income strategy collecting premiums in retirement i could first, do nothing, since covered call premiums at my cost basis of 62.8 would be small second, use cash to purchase more stock at 50 and new protective put at 55 and continue selling premium. remember, i use only 10-20% of capital initially with the remainder in fixed income to generate an acceptable monthly income. i use the additional money to purchase at 50 thereby dollar cost averaging which would be in this case (50+62.8)/2 or 56.4 new cost basis. i don't mind dollar cost averaging with index etf's but i would with individual stocks. with the lower cost basis i can achieve generating covered call premiums without having a strike below my cost basis. third, i can roll the put down to a lower strike thereby selling the put option to take advantage of the increased intrinsic value of the put and then buy another put at a lower strike for continued protection. this will increase slightly my money at risk, but if the stock rebounds the lower strike allows me to participate more fully in the recovery of the stock should it rebound. example, again using option calculator if stock is 60 initially and i purchase a 70 strike put jan12 for 14.00 my net investment is 74 with 4 dollars at risk if stock drops to 54 (worst case scenerio the same day) the put is worth 18.1 if i sell that my net investment is 74-18.1 or 55.9 i can then bto the 65 put for 14.1 with new net investment of 55.9+14.1 or 70 i now have 5 dollars at risk 70 net invested minus guarantee of 65 from put if stock now drops to 48 the put is worth 18.5 so i stc that my new net invested is now 51.5 (70 - 18.5) now i bto the 60 put for 14.4 with new net investment of 51.5+14.4 or 65.9 i now have at risk 65.9 minus 60 or 5.9 dollars this is with a 20% decline of underlying i have only 5.9/60 or 9.8% at risk remember i still have 22 months of collecting premiums monthly or 90 days or whatever dte you choose..... drjoe --- In ConservativeOptionS trategies@ yahoogroups. com, Dom Brunone <dombrunone@ ...> wrote: > > joe, most traders who understand options also understand that owning the underlying with a protective put is mathematically equivalent to owning a leap call of the same duration. >   > This means that when the price goes up, it is a good thing.  It also means that the strategy which you outline is equivalent to writing short term calls on underlying Leaps, basically, the DLS strategy all over again.  So the worst case that you must account for is a continued drop in the price of the underlying. >   > So the real issue is how do you adjust if the underlying is at 50 when your short calls expire? >   > Dom > > --- On Mon, 3/1/10, joe & leigh <gass20@...> wrote: > > > From: joe & leigh <gass20@...> > Subject: [ConservativeOption Strategies] Adjusting Your DITM Leap Put with Increasing Stock Price > To: ConservativeOptionS trategies@ yahoogroups. com > Date: Monday, March 1, 2010, 9:07 AM > > >   > > > > Adjusting Your DITM Leap Put with Increasing Stock Price > > The example below was done using option calculator from Ivolatility. com using IWM, (ETF), using IV=25% > > Starting data: Iwm = 62.8 date 2/27/2010 > > Purchasing Jan12-70 strike leap put (696 dte) and selling 90 day covered calls for income. > > 696 dte â€" bto 70 leap put for 13.3 > net invested = 62.8 + 13.3 = 76.1 > at risk = 76.1 â€" 70 = 6.1 or 6.1/70 or 8.7% > > at covered call expiration stock increases to 70 same price as leap put strike > > most traders would think this is a bad scenario for someone with protective puts, ie. They feel if underlying increases they are losing money. Well let's see. > > 602 dte â€" stock at 70 â€" stc leap put all time value = 9.06 and then bto the 75 strike leap put at 12.10. you increased your invested by (12.10-9.06) = 3.04. > your new net invested = 76.1 + 3.04 or 79.14 but look now > at risk = 79.14 â€" 75 = 4.14 or 4.14/75 = 5.5% > > 512 dte â€" stock at 75 â€" stc leap put all time value = 8.96 and then > bto the 80 strike leap put at 11.98. you increased your invested > by (11.98-8.96) = 3.02. > your new net invested = 79.14 + 3.02 or 82.16 but look now > at risk = 82.16 â€" 80 = 2.16 or 2.16/80 = 2.7% > > 422 dte â€" stock at 80 â€" stc leap put all time value = 8.69 > bto the 85 strike leap put at 11.69. you increased your invested > by (11.69-8.69) = 3.0 > your new net invested = 82.16 + 3.0 or 85.16 but look now > at risk = 85.16 â€" 85 = 0.16 or 0.16/85 = 0.0019% essentially no risk in the position. > > 332 dte â€" stock at 85 â€" stc leap put all time value = 8.22 > bto the 90 strike leap put at 11.22. you increased your invested > by (11.22-8.22) = 3.0 > your new net invested = 85.16 + 3.0 = 88.16 but look now > at risk = 88.16 â€" 90 = minus 1.84. ie you have NO risk in this trade and you still have 332 days to continue selling covered calls and collecting premium knowing you can't lose money at all. > > I usually look to roll out the leap put to a further out leap with 1 year to expiration. > > As you can see owning a leap put with an increasing stock price is not a bad situation at all but a good one if you are selling premiums. > > drjoe >

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