Plan B Of Saving My LEAPS Portfolio

I shared Plan A on how I intend to save my 450k LEAPS portfolio in the previous article by buying in and averaging down when there is an opportunity to do so in the next few months. In this article, I will share Plan B on how I intend to salvage something if shit hits the fan beyond June of 2023.

Looking at my top 4 holdings in my LEAPS Portfolio, they made up 70% of my total invested capital of $453k. So, if the top 4 fail, it means 70% of the money will be gone based if these 4 companies, Alphabet, Tesla, Meta (Facebook), and Microsoft all perform poorly in the next 12 months.

Plan B: Buying LEAPS PUT Contracts On Alphabet, Microsoft and Meta (Facebook)

So, my plan B would be to hedge against these companies crashing would be to buy a LEAPS PUT. Buying a PUT is a bearish bet as the buyer is hedging against falling share prices but locking in the strike price as the selling price regardless of the outcome. So, even as share prices fall, the PUT option seller can still sell at the agreed strike price.

In the unfortunate scenario whereby the companies’ share prices keep crashing (until 2024), there will be no way to salvage anything from the LEAPS CALL. However, the LEAPS PUT will turn profitable and help to recoup some losses. I intend to keep my LEAPS PUT capital to a maximum of 10% of my LEAPS CALL capital. This means if the market rallies, I will lose 10% of my capital, which is like an insurance fee that I paid to hedge against a future share price crash. Buying a LEAPS (long-dated) PUT will cost more but it gives me more time to wait for the development of the market over the next half year to one year before the contract expires.

Why I Am Not Buying Tesla LEAPS PUT?

I did not include buying Tesla LEAPS PUT as part of Plan B as I already hedged against the falling share price by selling long-dated CALL contracts on Tesla, to earn some returns when the share price drops. Also, Tesla’s share price is very volatile, so it is likely to swing up and down in short periods, which can get tricky with these contracts as I may not be able to exit my positions fast enough. So, I will stick to selling covered call with my 200 Tesla shares, should the share price keeps falling.

Concluding Thoughts

Previously, I was reluctant to buy PUT contracts as I thought they will cancel out my gains when the market rally happens. However, I feel there is still a need to prepare for the ultimate worst-case scenario where the market keeps crashing. So, this hedge is my insurance policy against the worst-case scenario.

There will be a few scenarios that will play out over the next 12 months.

The most desirable one for me is for the market to recover when inflation is under control and the war in Ukraine stops. Thereafter, I will gain back or make a profit off my capital in the LEAPS portfolio. However, I will lose or make some losses on the capital invested in the LEAPS PUT contracts.

In another scenario whereby the stock keeps falling over the next 12 months, I will lose my capital in the LEAPS portfolio despite the averaging down method of Plan A. The gains from Plan B will help to recoup some losses due to the falling market.

There is another scenario whereby the share price stays stagnant, which is in the middle of nowhere. The LEAPS PUT contracts will not make any money while I will not gain back the capital invested in the LEAPS CALL contracts. This scenario and the one above are not ideal for my portfolio.

Lastly, I will wait for red days to execute Plan A but wait for green days to execute Plan B. Due to volatility in the market, rallies and falls are not likely to sustain for a long period so such trends will usually reverse. Buying PUT on green days will mean the profits will increase when the trend reverses and the share price falls.

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