I have a blog reader who asked some questions about the LEAPS CALL Strategy that I am using. So, I thought it would be useful to share my replies for the benefit of everyone.
Question 1: May I ask for your LEAP call strategy, do you cut-loss if it reaches a certain value?
Jason: I do not usually cut loss because I buy LEAPS that are 1.5 years to 2 years out (in expiration date), so there is time for the stock price to recover or suffer a few dips in between. Having said that, cut-loss is a very good risk-management strategy and would have prevented me from losing 90% of my LEAPS Portfolio value if I was bold enough to execute this strategy many months ago when the market had just started to correct.
Question 2: Do you buy back your call and open another OTM one at some point to extend the expiry and slow down the theta decay? Or you will wait till expiry?
Jason: I do not roll (sell to close and then buy another one to open) my LEAPS CALL contracts, I usually try to average them down to try to save them before expiry but if share price and premium price do not recover by then, I will let the contract expire worthless. So far, my Nio CALL contracts had expired worthless in June 2022 and in September 2022, my Meta CALL contracts will most likely expire worthless too.
Question 3: I believe you have considered the scenario that your leaps might not reach its strike and your premiums might expire worthless.
Jason: My LEAPS CALL strike price is far Out-of-The-Money (OTM), I think it will never reach the strike price even when there is a rally. The key is not to aim for the strike price but for the future share price to rise higher than the share price when I first bought the LEAPS CALL options. As theta decay comes into mind, I need a higher rise in share price to make up for the difference. I have explained the concept here:
I Was Laughed At When I Told Them I Bought LEAPS With A Low Delta
Question 4: Is there such a thing as doing a leap sell call position at a different strike to make sure time decay works in your favor to cushion some of the reduce the max loss of your LEAPS should this scenario occur?
I did buy contracts at different strike prices depending on the budget I have. I chose a higher strike price in exchange for a lower premium paid. However, the strike price does not affect much of time decay. It is the expiration date that matters, a longer expiration dates will give you more time to decay but it comes at a higher premium.
Question 5: Or perhaps a selling call with a small number of contracts at a shorter timeframe DTE to milk some of the premiums while you are waiting for your long-term LEAPS to play out?
That is PMCC (Poor Man’s Covered Call), where you sell a short call contract and use your long call contracts that you have bought as a form of collateral. My brokerage, Interactive Brokers, does not allow PMCC as I will need to have the collateral in cash to buy 100 units if I wish to do PMCC. As my LEAPS CALLS are for high-priced stocks and far OTM, which means I pay a minimum premium for each contract, I do not have the collateral to do PMCC.
The other way to do this is via selling naked call, i.e. you sell CALL options without owning the shares, which is a high risk move in my opinion. Selling naked CALL is something I would not consider as it has unlimited risk. I have written an article about this:
Understanding The Risk Of Margins, Selling Naked CALL & PUTS
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