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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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:
The Ultimate LEAPS Options Thread
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 on executing these trades:
MY TRADES
If the bear market in 2022 is making feel depressed as your stocks come tumbling down, read this article to find out how you can use options trading to help you claw back some of your losses as you await market recovery:
How I Do Earn Even When The Stock Market Is Bearish?
Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market
I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day
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:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021
This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months
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The Newbie Guide To Technical Analysis (TA)
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How To Buy Options on Interactive Brokers (Step-By-Step)
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