Since84
Moderator
To infinity and beyond!
Posts: 3,933
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Post by Since84 on Oct 27, 2017 4:49:02 GMT -8
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chinacat
Moderator
AAPL Long since 2006
Posts: 4,433
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Post by chinacat on Oct 27, 2017 5:16:34 GMT -8
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Post by incorrigible on Oct 27, 2017 5:23:01 GMT -8
"Friday, February 27, 2017" February?! It's cold here on Long Island but not that cold.
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Post by gtrplyr on Oct 27, 2017 6:21:37 GMT -8
Wait a minute ..... I thought we were DOOMED !
Cheers to the longs !
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chinacat
Moderator
AAPL Long since 2006
Posts: 4,433
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Post by chinacat on Oct 27, 2017 7:35:57 GMT -8
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chinacat
Moderator
AAPL Long since 2006
Posts: 4,433
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Post by chinacat on Oct 27, 2017 8:18:37 GMT -8
Can I get a "Wheeeee!" ?
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Ted
fire starter
Posts: 882
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Post by Ted on Oct 27, 2017 8:41:23 GMT -8
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Post by dreamRaj on Oct 27, 2017 8:47:57 GMT -8
It should be more like...
WHEEEEEEEE!!!!
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Post by dmiller on Oct 27, 2017 10:24:29 GMT -8
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4aapl
Moderator
Posts: 3,679
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Post by 4aapl on Oct 27, 2017 10:45:27 GMT -8
I continue to be fascinated by LEAPS and the various strategies they offer. My current interest is in the idea of selling OTM leaps that are 2 years out and rolling them every year. I am making the assumption that no one would have an interest in calling a LEAP, even one ITM if it still has a lot of time value left. For example, if I hold a LEAP due in 2019 that is ITM, the value of the LEAP is based on the intrinsic value (the difference between the strike price and the current price of the stock) and the time value (the premium paid to have the right to buy the stock at the strike price. Think of it as insurance). Both of these are modified by the volatility and share price, but let's ignore that for now. Exercising the option essentially gives up the time value component of the option. It would make more sense to sell the option, then use the money to buy the stock outright. Suppose that you sold LEAPS due in Jan 2020 today with a strike of 200. You would receive $1150 per contract. If we assume for simplicity that the share price and volatility are constant, in January of 2019, the value of the contract would be $525. The difference is due to the reduced time value. You make $625 per contract with essentially no risk. Rinse and repeat. Since you will be buying back the old options and selling new ones, the effect of both volatility and share price should roughly cancel out. My apologies to those here who are old hands at this. I know it must seem pedantic. It is just easier for me to state it this way than as a long question. I believe that in options, there is no free lunch, what am I missing? I won't answer this fully, but like you are doing it's a good idea to look at why each side of an options trade exists. Often it's either trying to make a whole lot of money, or insurance. On a longer term call, if I think the stock is going to go up 50% in the next year, maybe I buy calls and change that into a 150% gain. Likewise, if someone else is looking for a lower risk investment that still pays out, maybe they buy the stock to give them a 2% dividend, and write calls that are 10% out but give them another 4%. They make 6% upfront (well, 4%, plus up to 2% if they don't get called away early during the year), and can make as much as 16%. You understand all that. I'm just restating it, for others. There's always both sides of the trade. The problem I have is that while I've changed options strategies over the years (from straight calls, to out of the money bull call spreads, to at or in the money bull call spreads, with some covered calls in there occasionally too), they also have different ideal timeframes to enter. If my timing was great, writing covered calls would be done at or near the top, whereas buying ATM or ITM spreads would be done when the stock was down or at a midpoint. And if writing puts, that would be great when at a low point. Either way, the problem I've had lately with options is it starts getting me worried about small moves, and timeframes. If I'm buying an ATM 2.5 or 5 point spread, and it's evenly distributed around the current price, the stock only needs to move 1-1.5% to have the spread make 100%. Likewise, it could go down 1-1.5% and be a 100% loss. That's such a small move, that it could happen for any reason, or no reason. You can try to be careful by looking at open interest, picking below any high points, and hoping that means the big players have no reason to push it down that low. But in the short term, with that small of a move, all it takes is one "rumor" at the wrong time. A way around that is to buy those spreads far out, but then you really have to hold it until then to get the full value, and if the short side goes ITM you can have it called away, often by someone trying to grab the dividend. In that respect, life was easier before dividends. Back to your question, it basically comes down to risk and expectations. Maybe you feel AAPL is going to grow at 6-10% annualized, and you have stock to write against, so that's one side of the trade. But someone else maybe sees AAPL gaining 10-30%, and is happy to only have to put down a deposit, by buying an option. As long as you don't have too much seller's remorse if the stock goes up 30% while your gain was limited at 10%, then it's an ok thing to do. It seems to me to be a good way to force a move towards diversification, especially if you don't have something ready to move into. But it leaves open the downside, that if the stock drops before you sell out, you experience that downturn...while keeping that couple percent from the option sale. 162.70 with a volume of 23.7, just over 3 hrs in. Now 33M in just over 5 hrs. Nice move so far AAPL!
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Post by dreamRaj on Oct 27, 2017 10:50:36 GMT -8
The last time AAPL's gone up more than $3-$4 is after last ER. So today is definitely a WOW WHEEEE!! But then it shouldn't have dipped lower in the first place. But then how else will some of us traders get to make money?! Made like 10000 or so from the BTFDs of the past two weeks.
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Post by dreamRaj on Oct 27, 2017 11:08:30 GMT -8
I continue to be fascinated by LEAPS and the various strategies they offer... I won't answer this fully, but like you are doing it's a good idea... bud, 4aapl - I LOVE your technical minds! bud - You did one of the most impressive moves with hedging AAPL with your house thingy back then. None of us longtime regulars can forget that. 4aapl - The way you explain your technical analysis of AAPL options in a simple way often stops me in my track. I truly appreciate your inputs. There are a couple more members here that provide excellent views on options and technicals but I can't seem to pin their names at the moment. If you guys ever invest in an AAPL trade that you have a strong good feeling about, please post it and I will most likely follow it.
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bud777
fire starter
Posts: 1,354
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Post by bud777 on Oct 27, 2017 11:46:32 GMT -8
In reply to 4appl, thank you for such a thorough response and for your previous messages. I want to be clear to everyone what I am thinking about doing. Just like with the mortgage financing I used 5 years ago, I am always looking for a way to make a (not necessarily quick ) buck. With the mortgage financing, I bought the stock with someone else's money, made a little on the difference between the interest paid and dividends received and have seen 100 points per share of appreciation. Being the greedy guy that I am, I am looking for another opportunity.
The idea is basically this: No sane person will call options that still have a year of time value left. This is simply because they can always make more money by selling the option and then buying the stock at market. I believe that most people using options are after the leverage, not looking for a long term cash flow. If you sell options with a 2 year expiration, then roll them out after one year, you can harvest the drop in option cost due to the time difference with virtually no risk.
The interesting aspect of this is that it doesn't matter if the stock goes up or down. Since you are buying back one position and selling another, stock movement is not a factor. If you do this with covered calls, you can use this to move up the strike price each year or to harvest a small gain.
Consider this example: Last year, in October you sold covered calls with a expiration of January 2019 and a strike of 150. It does not matter what you received for them or where Apple was at the time. Right now you can sell January 2020 calls with the same strike for 31.75 per share. You can take those proceeds and buy back the 2019 calls for 25.55 giving you a 6.20 profit per share. Part of the difference is due to change in the intrinsic price, but much of it is due to the fact that you are buying back options with a year to go and selling options with 2 years to go. You could keep the strike price the same, or you could increase the strike price on the calls you sell so that the premiums are equal. In this case, you would sell calls at 165 to replace the ones you are buying back at 150.
There are a couple of other advantages. If we experience another 40% drop like we saw in 2013 or last year, the intrinsic value of the stocks goes away. In this case, you can can buy the options back at a discount and get out for a while. Since share price and volatility would have approximately equal effects on the sale and purchase, all the risks we usually look at are irrelevant.
I am desperately looking for someone to blow holes in this. It looks like free money.
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Post by archibaldtuttle on Oct 27, 2017 12:42:41 GMT -8
Bud, seems to me to be a sound enough idea but here's my view of the downside: this plan caps your potential upside.
If AAPL stays around the same price or decreases, you win. You make free money forever. But if it goes up by a lot you do worse than you would have just holding the stock.
Let's say that right now you own 100 shares of AAPL, for a total value of $16,300. You sell a January 2019 170 call for 15, pocketing $1500.
In a few months, you decide to roll this covered call into the 2020s as you describe. And let's say you've chosen a good time, since the stock is still trading exactly at 163 in a few months. You decide to stick with the 170 calls at 2020 strike, and now you buy back the 2019 170 call for let's say 13, selling the 2020 for 21. You pocket an additional $800. All good so far. $2300 income on your $16,300 portfolio!
But now, in spring of 2018, the market loves AAPL and iPhone Xs are selling like nobody's business. The stock rockets from 163 to 243. Wowza! Everyone here on the board is celebrating. But you're not.
That's because your portfolio hasn't appreciated at all on the trip from 170-243. It would be worth $17,000, plus the $2300 cash you have rattling around in it. $19,300 total.
That's compared to the $24,300 of value you'd have if you had just held your shares. So you're $5000 worse off than you would have been.
But you're going to roll over the options to the next year, so you can catch up a bit, right?
Now, we know AAPL doesn't do anything simple. But let's say for the sake of this discussion that it plateaus at 243 and stays there for a year. It's January 2019 now.
To roll your 2020 covered calls into 2021s, you'd have to decide whether to go with the 170s again or choose a higher strike. But the difference between your 2020 170s and the 2021 170s won't be very much because they're so far in the money. Let's say the 2020 170 calls are now worth $78 and the 2021s are $83. So you could pocket another $500 of income by sticking with the 170s.
But you can't roll them into a much higher strike, because then the sale won't cover the cost of buying back your expensive 170 calls. The $200 2021 calls, for example, might be trading for $65. So to roll into a higher strike you'd actually have to spend some of your cash.
Thoughts?
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4aapl
Moderator
Posts: 3,679
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Post by 4aapl on Oct 27, 2017 14:19:56 GMT -8
Just like with the mortgage financing I used 5 years ago, I am always looking for a way to make a (not necessarily quick ) buck. With the mortgage financing, I bought the stock with someone else's money, made a little on the difference between the interest paid and dividends received and have seen 100 points per share of appreciation. Being the greedy guy that I am, I am looking for another opportunity. I am desperately looking for someone to blow holes in this. It looks like free money. One way to look at this is to separate out the parts, of the stock and the covered calls. Would you consider the same choice, of buying the stock and writing ongoing covered calls against it, if today you accidentally sold all of your shares, and so just had a pile of cash to decide how to invest? But first some history. 7.5 years ago I too took out a mortgage on our former house, initially buying a few stocks and writing covered calls against them. But with my spreads doing so well in other accounts, and fungibility between accounts, that mostly switched to buying spreads in that account too. One purchase that I made was buying BP, on it's post-spill decline from 60, eventually bottoming out below 30. I bought on the decline at 45, after a small bounce that made it look like it could be the floor. I believe I wrote some covered calls right away, and it had a ~12% dividend or something crazy like that. But continuing to dive to 28 or so, and with expected costs for the spill mounting, they cut the dividend. And then came the question in writing covered calls....if my cost basis is 45, minus minimal income to date, do I go ahead and write covered calls down at 35. If the stock bounced, the shares would get called away and I would get locked in to a loss. BP stock is now at 39, though it did make it to and beyond 45 for a little bit back in 2014. It's dividend is now around 6%. It's a very small percentage of our portfolio, so I don't think much about it, though it and mainly some Chevron shares give us a hedge on gas prices. But I should go ahead and write some covered calls on both of those, since I'm relatively detached from them. Still, that downtrend and resulting decision about if you write covered calls that could give you a loss, or stick with a strike that is at or above your cost but then gives you very little premium, is a good thing to think about. AAPL will go down again in the future, with or without the same happening to the market as a whole. It's good to think about that sort of thing now. Back to separating the parts, would you write "covered calls" at the same strikes and expirations if it was backed by a pile of cash instead of a pile of shares? What about rolling it forward to further expirations? Would you do the same if considering it two different transactions, instead of "rolling it forward"? It does depend a bit on what you are doing with the money. If you are living off of it directly, with the longer term plan to diversify, then it could very well make sense to lock in a combined return of 10% or 15% or 20%, even if you think the stock is likely to do better. Maybe the dividend plus the premium gives you plenty to work with, and the strike is high enough that you would be fine selling at that point if it ended up there. But even if planning on rolling the expirations forward, you are selling off the upside. If you write covered calls 10% out, and make a 2% premium doing that, you still lose out on potential further gains if the stock beats that 12% combined mark. If the stock gains 24%, you only made half of what you would have. OTOH, if the stock gains only 10%, or gains less than that, you "beat the market" by 2%. Rolling the covered calls forward just compounds that. OTOH, it is a way to make expected gains a little more consistent. In the Retire Early mindset, there's the 4% rule, which like many guesstimates has a bunch of variables like your expected lifetime, stock returns minus inflation, and your stock/bond mix. Often you use market trends for 30 year segments, and pick a "go broke" threshold, like a 99% chance of not going broke. But if you look at the outcomes, most are that when you eventually kick the bucket, you'll have more money than you started with. And the difference is often made in your first couple years of retirement, when a downturn or upturn can decide if your portfolio decreases or increases, for the rest of your life. One option to mitigate the potential demise is to have flexibility, especially in those first couple years, either by cutting your expenses, or gaining income so you don't have to pull from your nest egg....ie get a job. But in the 18 years that I have sometimes used options, I've wondered how the calculation would look if you instead used covered calls. While it would be fine to die with much more money than expected, I believe most would be happier to cut back on the upside if it increased their likelihood of not going broke. Or for that matter, if it gave a higher Safe Withdrawal rate, and thus let them retire sooner. That may seem like a tangent, but it's really the same thing. You're turning an unknown into a little bit more of a known thing. And there's lots of reasons to do that. But basically, you're selling off the high side, giving you a little more consistent return while also having a little more cushion if things fall. Over the years, I've found that with options, second only to timing is to aim up your purchase to what the stock actually does. And while that's even more important with spreads, it's still important with all options. If AAPL was at $100 and hit $200 a year from now, it would be much more lucrative to have bought 4 times as many calls at a 150 strike, than less at a strike of 100. At the same time, if the stock only made it to 150, the difference would be significant, but in the other direction. I imagine that you would maximize your covered call profits by writing with strikes that are at or slightly above what the stock value ends up being. Or if selling early, then the trajectory where people realistically expect the stock to be headed. While analysts haven't had the best track record in the distant past, now that Apple is much larger and thus a little easier to predict in the right ballfield, they tend to at least give a starting point that is relatively close. Like a lot of things, it depends on how aggressive you want to be. For me, offhand at any given moment, I'd guess that AAPL would gain 15-20% a year (though looking at the last 3-5 years, we can see great variances in this, even if the long term average works out), and so I would look at strikes based on a 20% or even 25% annualized increase. (one thing to note on covered calls being called early. Offhand it does seem like if there's any premium, someone would just sell and then buy the stock instead. A problem here is the tax code, which lets you roll forward your gain if exercising an option to buy stock, and also extend your holding period to give you LTCG rates and discounted rates on dividends. Just be warned that it might not just be down at the pennies or even dimes level that an option is likely to be called away, but even at low single digit dollars per share) I hope that all somewhat makes sense. I think the best thing to do is to try to separate the pieces, making sure that it makes sense with them separate. Likewise, it's good to attempt to get unemotional about the investments, just as it's good to not let the taxes play too much of a role in the decision making process. For me at least, they all do come together, for better or worse. But knowing the separate pieces, or thinking about it in a different way, helps keep you level minded. Long story short, it's only free money if you correctly guess where the stock will be at expiration. If that's a 28% gain from here and you correctly hit that, then your 4% premium is your "free money". But be careful. You likely paid for it with stress equity.
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bud777
fire starter
Posts: 1,354
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Post by bud777 on Oct 27, 2017 15:06:17 GMT -8
Bud, seems to me to be a sound enough idea but here's my view of the downside: this plan caps your potential upside. If AAPL stays around the same price or decreases, you win. You make free money forever. But if it goes up by a lot you do worse than you would have just holding the stock. Let's say that right now you own 100 shares of AAPL, for a total value of $16,300. You sell a January 2019 170 call for 15, pocketing $1500. In a few months, you decide to roll this covered call into the 2020s as you describe. And let's say you've chosen a good time, since the stock is still trading exactly at 163 in a few months. You decide to stick with the 170 calls at 2020 strike, and now you buy back the 2019 170 call for let's say 13, selling the 2020 for 21. You pocket an additional $800. All good so far. $2300 income on your $16,300 portfolio! But now, in spring of 2018, the market loves AAPL and iPhone Xs are selling like nobody's business. The stock rockets from 163 to 243. Wowza! Everyone here on the board is celebrating. But you're not. That's because your portfolio hasn't appreciated at all on the trip from 170-243. It would be worth $17,000, plus the $2300 cash you have rattling around in it. $19,300 total. That's compared to the $24,300 of value you'd have if you had just held your shares. So you're $5000 worse off than you would have been. But you're going to roll over the options to the next year, so you can catch up a bit, right? Now, we know AAPL doesn't do anything simple. But let's say for the sake of this discussion that it plateaus at 243 and stays there for a year. It's January 2019 now. To roll your 2020 covered calls into 2021s, you'd have to decide whether to go with the 170s again or choose a higher strike. But the difference between your 2020 170s and the 2021 170s won't be very much because they're so far in the money. Let's say the 2020 170 calls are now worth $78 and the 2021s are $83. So you could pocket another $500 of income by sticking with the 170s. But you can't roll them into a much higher strike, because then the sale won't cover the cost of buying back your expensive 170 calls. The $200 2021 calls, for example, might be trading for $65. So to roll into a higher strike you'd actually have to spend some of your cash. Thoughts? I agree with everything you said. i think what makes this appealing is that I am not too concerned about the upside. Thanks to Apple, i have more money than I need so the marginal value of the upside is not that great. Partly this is because I am old and partly this is because Apple has been so good to me. Given that, another $50k - $100k of walking around money never hurts. I am beginning to see that this strategy, if applied over several years and if Apple continues its rise, could cause one to own options that are deeper and deeper ITM. I guess it comes down to how one values cash flow vs. net worth. Thank you for looking at this.
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