If you have followed my story since last year, you would have known that I have used the LEAPS strategy to generate very good returns in 2021 because it is a powerful strategy that can magnify returns in a bull market. However, this strategy is also a double-edged sword as it can also magnify loss when the market turns bearish, which I have explained in the article about the risk of buying LEAPS.
2022 was a disastrous year for my LEAPS portfolio as its net liquid worth fell to around 10% of the total invested capital, which means if I were to sell all my positions today, I would end up taking back only 10% of my money (which is around SGD45k out of a total of SGD 449k).
This happens because my LEAPS Portfolio is tech and chip heavy and the rising interest rate environment hits the tech sector hard as most of the share prices are built on future earnings. When interest rates rise, it means that these companies will incur more costs when borrowing and their profits will reduce, which translates to a drop in share price. The Nasdaq is also the first major US stock indices to go into a bear market due to a huge correction that started at the end Nov 2021.
If the market continues to stay sideways or continues to fall until the expiration date of my LEAPS CALL options contracts, they will then expire worthless, which means 100% loss of the capital that I put into the respective contracts that expire.
I did a consolidation recently on the amount of capital that I may lose should the contracts expire one by one, periodically, starting from the earliest to the date furthest away. The below snapshot shows the total amount of money invested in each phase, based on the contract expiry date.
This data gave me some hope as a large percentage of my capital, about 75%, will expire worthless from Jun 2023 to Jan 2024. This means there are roughly around 1 to 1.5 years before these contracts expire worthless. To drill down further, 50% of my 449k invested capital will only expire worthless in Jan 2024 if the market does not recover by then.
What Is My Plan Moving Forward?
My plan moving forward is to try to save the LEAPS positions that are expiring from June 2023 onwards, whenever I can, by averaging down with small amounts in each buy. On red days where there is a huge fall in share prices, I will buy the options contracts whose premiums have dropped to less than 10% of what I paid when I first bought them. I will try to keep to a double-digit purchase for each contract that I buy.
I am also mentally prepared to lose 25% of my capital if the stock market continues to stay depressed until April 2023 as my options contracts expiring by April 23 will all become worthless. I am thinking of ways to hedge for these CALL contracts to prevent a 25% loss of capital should this happens.
By then, for the LEAP CALL options contracts expiring after May 2023, I would have bought a substantial amount to lower the premium paid for each contract and thus be able to have a higher chance of breaking even.
However, if the market continues to go down for the next few years, that will mean that whatever I have invested now to try to save these positions, no matter how small the contract premium paid, will all go down the drain together with my original invested capital.
I personally think that there will be more pain in the market for the next 3 months. Thereafter, the fears of recession, interest rate hikes, the effect of inflation as well as the poor performance of the stock market, will cause people to cut down on their spending significantly and bring down the inflation numbers from September onwards. The stock market may head for a rebound by then. So, I hope that my strategy of averaging down, in the smallest ways, now can help save my LEAPS portfolio should there be a rally by the end of the year.
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The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
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Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:
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I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
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4 thoughts on “My LEAPS Portfolio Is Not Dead Yet, It Still Has 1 to 1.5 Years To Live”
Hi Jason, thanks for your sharing. Just wondering for your LEAPS, do you sell short duration Covered Call options to earn some premium to lower your breakeven?
Hi LT, I don’t do that as somehow my brokerage (IBKR) does not see the LEAPS positions as collateral for doing covered CALL. Also, my LEAPS CALL are mostly OTM, I don’t see the logic of how this can be used as actual shares to sell covered call.
What would be your strategy to salvage the 90% losses? How do you build a portfolio that can withstand market downturns? Have you thought of buying call spreads, rather than naked calls? Puts, etc.,
Hi RP, as I share in the article, I will average down my cost price over the next few months when the market dips. I am considering buying PUTS to hedge against my positions with the biggest capital invested. Btw, I am not selling any naked CALL.