Alternative: the 49 contracts refers to the example in the paper
Leg into the DLS position. For example, above we decided to purchase 49 contracts. Leg in over 3 months. If today is May do not STO all 49 for June expiration. Instead STO a third of the contracts (16) for August expiration. At June expiration STO another third, 16 contracts, for the September expiration and at July expiration STO the remaining contracts 17 contracts October expiration . You will now have your total 49 contracts at July expiration. At August expiration you will have a third of your contracts expiring and need to managed appropriately.
What is the advantage of this approach? Many people have told me they opened their DLS position using the near month call option only to see a correction in the underlying stock and they were seriously concerned and many abandoned the strategy.
What scares them is the percentage loss....if the stock drops 10%, the leap will drop percentage wise for example
if iwm was 70 and dropped 10% it would be at 63
if you had a leap value of 25 with delta of 0.8....a 7 point drop in underlying would be 7 times 0.8 or 5.6 loss of value of leap or leap would be around 19.4....that is a 22.4% drop...this makes people nervous if they don't understand
Using this approach, if the market has a correction you will be adding leaps at various cost basis averaging down.
Also,,, when going out 3 months most often you will receive enough premiums to have at least 10% dsp
Also...most often you will get enough premium to have the spread of the long and short strikes to be greater than your net debit....therefore even if you get assigned (which you want to avoid)....you will not loose money but have a profit.....even at a 1;1 ratio
Summary:
May STO August 16 contracts
June STO September 16 contracts
July STO October 17 contracts
August 16 contracts expiring STO November 16 contracts
etc, etc
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