JamesBond

A variation of that is THE quote that has always stuck in my head about all this was in one of the early books I read on options investing. "You never make any money buying, you only make money when you sell".

Trip7

For a LEAP Call on BABA I only need $6000ish. I'm simply making an equity substitution and applying leverage. If I'm selling a Put to generate the same type of return it will require significant Margin in case the price goes against and the buyer decides to exercise the option early. Combine those risk factors with short term capital gains on premiums, selling Puts is more of a hedging strategy and not optimal use of capital for the long term investor

Sent from my SM-N986U using Tapatalk

mispoken

Trip, as usual, you prove you know just enough to get yourself (but, hopefully not others) into trouble. You obviously do not have a full grasp as to how margin works, nor do you truly understand how risk works.

If I had a dime for every time you used the quote from the book you read that made you think you understood what you were talking about, I’d be able to have a nice dinner. You have a visceral aversion to “permanent loss of capital” and if you want your best shot at that, look no further than buying long calls or puts. Not only do you have to be directionally correct, you also have to nail the time frame. If you want long calls as a stock replacement you must go MUCH deeper in the money than 20% with LEAPS. You are looking for a 1 delta, which is sub $100 strike in 2023 and very expensive. Like $15k, expensive. What’s more likely? A long call expiring worthless or one of the stocks you dub “a story stock” going to zero? Again, you don’t fully understand risk or probabilities.

If you buy a call for $60 ($6000) and you aren’t lucky enough to have time and direction right, you will most definitely have a :::gasp:::: permanent loss of capital. If you sell a put, you MAY be assigned, and you MAY have a margin call (depending on if you’re in a portfolio margin account or a regulationT account), but you can also turn around and sell the shares back at a loss much less than a 100% loss should your calls expire worthless.

You tell me what is a greater risk; a 100% loss of capital from a long call expiring worthless or getting assigned a stock at $200/share when it fell to $150 and you sell it back when assigned. Do the math and get back to me.

If you view a permanent loss of capital as your greatest risk, then you are completely contradicting yourself. There are many more opportunities to take stock in companies you like with a short put at a reduced basis or, roll contracts indefinitely and generate significant income while lowering cost basis.

Back to my original point, you think you know more than you do, and that might be far more valueable advice than what you read in a “value investing” book. You not only think you know the actual value of a multi billion dollar corporation but you think you can peg a share price and a date. Why don’t we call it what it is; a gamble and I take them all the time. The difference is that I accept it as a gamble and risk only a fraction of a % of my NLV.

Options need not be a gamble, you can certainly play probabilities and use the leverage to your advantage like JamesBond mentioned.

I suggest anyone reading trips post approach with extreme caution. While he SOUNDS like he knows what he’s talking about, seasoned investors know otherwise. If you want to learn how to trade options in a way that can be very lucrative, leave here and dig into tastytrade.com materials.

Gunfighter

That was the genesis of the QDRO, but it can be used in other ways. I'm contemplating pulling money out for real estate investments in 2022 or 2023. Because of the original use in divorce proceedings, I think it takes a husband & wife combo to do it. Still researching...

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.

mispoken

1-If BABA is a huge value like you’ve calculated based on a BS metric, taking assignment at a reduced cost basis is an even greater value. Risking $6k with the highest probability of “PERMANENT LOSS OF CAPITAL”. If you’d like to know the probability of profit, it’s 34%. Buying stock gives you at least 50%. Holding shares indefinitely, the probability increases. Again, if permanent loss of capital is what you’re trying to avoid, buying calls ain’t the way to do it. Half of the premium you’re paying is extrinsic value and is lost daily to time decay. It sounds like this is sound long term investing for you. Best of luck with that.

2-A true stock replacement is a delta of 1. If you want the leaps to act like stock, you buy a 1 delta call or at a minimum 2 standard deviations below the ATM call.

3-Again, you don’t understand how margin works. It’s dependent on if you’re in a regulation T account, a portfolio margin account or a retirement account (cash covered). Each one requires a different amount of buying power to cover a naked put. Your example above says this would tie up $21k of buying power which simply isn’t true unless you’re in a cash covered account like your retirement account at which point a “margin call” that you mentioned in your other post is not a player. Again, you seem to know just enough, but not nearly as much as you think. In your example the Jan 2023 $170 put in my regulation T margin account tied up $1751 in buying power and nets me around $700 in premium.

3-short term capital gains are treated as ordinary income. That is to say I pay on that, what I pay at my regular job. Do you not go to work because you have to pay taxes? This does not have to be a long screen time event and To say you don’t want to make an extra $100k in a year because you have to pay $30k in taxes is well….stupid. Are there more tax efficient ways of making money out there? Sure, I’ll give you that. But in my world I don’t let the tail wag the dog.

4-If me telling people to approach what you say with caution and posting a link for people to get a real education on options is snake oil, then what is the garbage you post? Let me provide some examples; you posted “Tesla is due for a STEEP decline” and then posting a tweet from Michael Burry. How about another? You posted “It’s not too late to get out of bubble stocks” and posting a link to a WSJ article. Snake oil salesmen sell fear. That is the crux of your “investing advice” on here; Fear. Bubbles. Margin calls. Overvalued. Oh my. If your due diligence is a tweet and WSJ article, I reiterate my caution.

I’d say your best strategy so far has been trolling me. Hook, line and sinker every time. 🍻

Trip7

Are those general probabilities? Where are you getting 34% and 50% from? If they are general probabilities those are of no concern to me. I access risk on a per company basis. FYI BABA, GOOG and FB LEAPS are very popular right now amongst value investors. There's a reason why. Sheer outrageous value.



No I don't want a LEAPS to act exactly like a stock. That's why I bought a LEAPS not a stock. Again, buying LEAPS of large, undervalued companies at a Delta of. 7-.8 has a very attractive risk reward profile



Again I stated Margin requirements vary among brokerages. Now in your example, you net $700($400 after tax) in premium, then the market goes against you and BABA drops to $170, now a $17,000 margin call is possible if you don't have enough buying power to cover, forcing you to sell other assets if you can't come up with the cash. Meanwhile with my LEAPS only $6100 is at risk with a long time horizon



I don't mind short term gains if it's the most efficient way at extracting value. I've had plenty of short term gains from Net Net investing. Selling Puts is flat out inefficient to LEAPS if you have conviction in the direction of the stock over the long term. $700 premium plus risk of $17,000 cash outlay vs $6100 premium and strong possibility of 100%+ ROI taxed at long term capital gains. Moreover if BABA dropped to $170 I can just buy more LEAPS driving down my cost basis and still use less than $17000 in capital



When it comes to securities like TSLA and ARKK, I'm not selling fear. I'm advocating for reality. This has happened before in the 2000s. Know your history or be doomed to repeat it. The intrinsic value of a stock is its future cashflows discounted to the present value. If you want to pay eyewatering amounts for cashflows that don't exist and you believe the company will grow those cashflows due to a "Story" that's on you. I'm just here to give folks fair warning to DYODD when listening to such silliness. You probably would have been preaching about Yahoo and Pets.com in the 2000s.

Tesla Enterprise Value: $600 Bil
Tesla Earnings before Tax and Depreciation: $4.7B

Without the stock moving a single penny Tesla would have to grow earnings to $30 Bil just for a valuation of 20x earnings. And again, that's without the stock pricebadvancing a single penny. Unless you're using a momentum strategy with these story stocks, good luck

Sent from my SM-N986U using Tapatalk

ShyGuy

I kept it simple, I bought 412 shares of BABA at $212

mispoken

You realize if you’re assigned a stock from a naked put you get actual shares of stock, right? In this case you’d get 100 shares at a basis of $163. It’s your stock and you can sell them back.

You don’t have a $17k cash outlay upfront, it simply earmarks $1750 of your buying power. Your method you have a $6k cash outlay up front. You only make money if the stock goes up in price within a finite time period. If you’re assigned shares, And you don’t have 50% of the cash required you will get a margin call to bring you back to 50% of the position value. The rest is covered with margin which you will pay interest on, this varies from broker to broker. In this case, if you get below $8500 in margin you will receive a call and will have to bring your buying power back in line with regulation T account requirements. Easiest way to do that? Sell the shares assigned back. A margin call is not a big deal assuming you didn’t take some stupidly large risk. This whole discussion ignores the possibility of rolling the put out in time and adjusting the strike to collect even more premium. This is a beginners level intro as to how margin works. Your interpretation of it is not complete or accurate. I suggest before you go further with options, you study how margin works more in depth.

Finally, let’s define something; Risk. The book you read beats into your head, permanent loss of capital is the ultimate risk and you seem to have adopted that mentality. Agree? There is no higher probability of 100% loss of capital than buying calls. Deep in the money is “least worst” depending on how deep you go and since the deeper you go, the more intrinsic value. The probabilities get worse the closer to the money and further out of the money you go. It’s a mathematical fact, there’s no greater probability of losing 100% of your money than buying calls. Much higher than owning the stock outright. The chances of losing SOME money are very high.

I say this all as someone who has plenty in the way of DITM and far OTM calls. But, I understand the risk and buy accordingly.

BTW I was looking at the wrong strikes; selling a Jan 2023 $170 put gets me $17 in premium and reduces buying power by $1700. So if assigned shares my break even is $153. If I buy the $170 call for $60 my BE is now $230.

JamesBond

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.