Originally Posted by
Trip7
LEAPS investing is a solid value investing strategy if you know what you are doing. By going Deep ITM, an investor protects their premium since the stock price is close to or more than breakeven. LEAPS by default are long term investments so the odds of being directionally correct are in your favor, especially for an undervalued stock. I know you invest in crazy expensive growth stocks like Tesla with no Margin of Safety so I don’t blame you for being worried about direction over the long term. An equity replacement strategy does not mean find a Delta of 1 to track the underlying asset to the penny. .70-.80 Delta is typically a good risk reward profile for this strategy
For my BABA LEAPS I have strong conviction BABA will move 8% before Jan 2023 as BABA has been growing earning 30%+ a year. Moreover, I don’t know the future, so I don’t project a precise valuation to companies, always a range. A stock like BABA based on a varying range of future cash flows looks like it is worth $320-$500. With the stock trading at $212, it doesn’t take a genius to realize this stock is undervalued. As Warren Buffett eloquently stated, “You don’t need to know a man’s weight to know he’s fat”.
In your example, if I buy a 1 BABA JAN 20 2023 $170 call I pay the $6100 premium and do not have to do anything until expiration for year and a half. To control the same amount of shares selling a put I open up myself to a margin call all the way to expiration based on the short term movement of the stock. Furthermore, many brokerages require you to have the buying power to cover the shares prior to selling the put. That’s too much work and an inefficient use of capital for my long term investing strategy. If another Black Swan event happens and the option expires worthless I’m out $6100 in 2023 and I didn’t have to tie up $21,200 buying 100 shares from the beginning.
As far as listening to me, I’d be the first to tell folks to DDYOD and invest in a manner that’s you’re comfortable with. I’m a long term investor. You trying to discredit me and send folks to “lucrative” options trading strategies is very snake oil salesman like. Those are short term strategies that usually result lots screen time trading along with short term capital gains tax.
OK... I am still working on coffee #1, but here's the thing. You talk about tying up $21,200 buying 100 shares. Unless you are trading options there is nothing that requires you to buy/sell 100 shares. Buy 10 at a time and dollar cost average. Or just buy $6100 worth. Your profit will actually be close to the same anyway when it all washes out and you don't have a time bomb ticking. (expiration) And, if they are underwater in Jan 2023, you can still hold on to them until they come back.I guess the good news is if we get a president that wants to go to economic war with China, and BABA tanks, you are only out $6100. Regardless of how you try to sell this, you are putting yourself behind at the start by that same $6100. The option has to increase by that amount for you to break even. That's a long way for the dy/dx. It very well might, but then again it might not.
I'm not trying to sell anyone on anything either. But what I will say is that it sounds like to me is that you are in love with this company and that is a dangerous thing. I would urge you to take a breath. Seriously.
I used to like to watch Options Action on CNBC every Friday (not religiously, but occasionally). I was trying to understand all those complex spreads and condors and flying Wallenda strategies that they were doing and after awhile I decided it was a lot of yoga for a little bit of money. And most of it was money paid out that was dependent on movement one way or the other. Jim Cramer won't talk about options other than in one of his books he says doing what you do is 'OK'. (I disagree, obviously) This stuff is not rocket surgery. Making it more complicated than it is is unnecessary.
I hope it works out for you and that you have found a hundred bagger. If you did, that $6100 worth of stock will have been worth more than the option, but hey ya gotta dance with who brung ya.
Enjoyable discussion rather than the monkey **** throwing contests usually found here.