Newbie Options Trading

[ongba]

Not sure how others feel but I think delayed construct bull call spreads are really nice when the price fluctuates like it does these days. With so many big swings it's fairly reasonable to buy a call when the price is dipping and when the price rises sell a call with a higher strike price. That helps to minimize risk while still providing a good opportunity for some gains. Thoughts?

From what I learned from the aapl options pdf, the delayed construct bull call spread(ie start with a naked call) is the instrument of choice when the underlying is in a very bullish phase (as tsla has been over the last several months) and overall market conditions are good as well. It allows the naked call to appreciate unhindered and to sell the top of the spread much higher (compared to an intact bull call spread). It's risk is the same as with all naked options, time decay, volatility crush, and swift depreciation in the option should the underlying correct significantly. The advantages of initiating an intact bull call spread from the start is the upper leg (since it was sold) provides some degree of a hedge from time decay and a drop in volatility. One can also buy back the higher leg if there is a big drop in the underlying for a profit, lowering cost basis of the lower leg (although this requires cash in reserve to execute). It's disadvantage is it moves much slower than the naked call and must be held closer to expiration to get max value. It is better utilized when the markets are in uncertain times, which IMO, we are currently in.

 

[mershaw2001]

hey onga, i think your delay construct bull spread technique is a very powerful tool (for some reason I was under the impression it was called legging into a bull spread) but you only cite the disadvantages of it once you've successfully constructed the spread and not the disadvantages if you can't get that top call sold. To me, I see the main disadvantage being that you've legged into the long end of the bull call, and the underlying stock doesn't rise high enough or fast enough for you to sell the short leg. In that case, what do you advise one to do?
1)buy call, price goes up, sell higher strike call. Easiest scenario, since you've essentially broken even no matter the outcome.

2) buy call. price goes down. Do you still wait to sell higher strike call?

3) buy call. price stays neutral for 2 weeks. Do you still wait to sell higher strike call?

 

[ongba]

hey onga, i think your delay construct bull spread technique is a very powerful tool (for some reason I was under the impression it was called legging into a bull spread) but you only cite the disadvantages of it once you've successfully constructed the spread and not the disadvantages if you can't get that top call sold. To me, I see the main disadvantage being that you've legged into the long end of the bull call, and the underlying stock doesn't rise high enough or fast enough for you to sell the short leg. In that case, what do you advise one to do?
1)buy call, price goes up, sell higher strike call. Easiest scenario, since you've essentially broken even no matter the outcome.

2) buy call. price goes down. Do you still wait to sell higher strike call?

3) buy call. price stays neutral for 2 weeks. Do you still wait to sell higher strike call?

Mershaw,

These are very good questions. The disadvantage you state is a serious risk when legging into a bull call spread (ie delayed construct spread). Because the risk is so high when you are initially setting up the long leg of the spread (ie haven't sold the top call to form the spread), the keys to decreasing the risk, IMHO based on my read of the aapl traders, are 1) wait patiently for the inevitable corrections in tsla and the markets before initiating the long leg as it gives you a better chance of a successful outcome 2) choose expiration dates at least 6 months to 2 years out for your options as they provide enough time for the markets to recover if there is a black swan event 3) do not carry the spreads to expiration unless they are FAR in the money 4) consider taking profits at 80-90% of max profit of the spread. With regards to your scenarios:
1) the dream scenario. Successful implementation of a bull call spread risk free, with risk capital returned to your pocket. IF it doesn't work out, the only thing you have lost is time
2) this is tricky because it depends on your outlook of the market. If you think the markets or tsla are headed for a sustained downturn, then yes, sell the call and get whatever cash you can get back. Recall that SNIPUS in the pdf often did this. It is better to get 50% cash back and create a spread, rather than leave the long call unhedged with potential to lose 100% of your risk capital. But do not sell the call below the strike that you bought the initial call as that would create a bear call spread, not a bull call spread. Now if you think the correction is short lived and you have long dated options bought when the underlying was at a reasonable price, then I would not sell the call just yet, hoping that the stock can recover.
3) You have to be patient with this strategy and not try to sell the higher call until it gains enough value for you to create a risk free/near risk free spread. This is more easily accomplished if you have long dated options as opposed to front month options (which I don't recommend) as you won't stress over the time decay since your long options are at least 6 months out till expiration. It is also easier after the underlying has corrected 10-15% as it allows you to sell the top half of the spread as the stock recovers.

 

[Ocelot]

hey onga, i think your delay construct bull spread technique is a very powerful tool (for some reason I was under the impression it was called legging into a bull spread) but you only cite the disadvantages of it once you've successfully constructed the spread and not the disadvantages if you can't get that top call sold. To me, I see the main disadvantage being that you've legged into the long end of the bull call, and the underlying stock doesn't rise high enough or fast enough for you to sell the short leg. In that case, what do you advise one to do?
1)buy call, price goes up, sell higher strike call. Easiest scenario, since you've essentially broken even no matter the outcome.

2) buy call. price goes down. Do you still wait to sell higher strike call?

3) buy call. price stays neutral for 2 weeks. Do you still wait to sell higher strike call?

thanks mershaw and onga, these questions and the reply really helped generate some understanding of the risk/scenarios.

- - - Updated - - -

I am wondering what is the best way to hedge? Currently if I buy straight puts for Jan at 135, it will cost about 22.8% of the total value of my investment in Tesla. . As my portfolio has nearly doubled, this seems reasonable, but was wondering if buying straight puts is the best way to "protect" some earnings? Also should i do it at various prices?

What I am worried about is a market correction, especially come fall with the unkowns of septaper, and war.

 

[ongba]

I am wondering what is the best way to hedge? Currently if I buy straight puts for Jan at 135, it will cost about 22.8% of the total value of my investment in Tesla. . As my portfolio has nearly doubled, this seems reasonable, but was wondering if buying straight puts is the best way to "protect" some earnings? Also should i do it at various prices?

What I am worried about is a market correction, especially come fall with the unkowns of septaper, and war.

Ocelot,

I think it is important to develop a thesis before any applying any options strategy. In the specific case of how to best hedge stock which has substantial gains, the questions one should ask, IMHO, before hedging should at least include the following: 1) how far of a correction does one anticipate 2) will the correction be short lived 3) is there significant upside to TSLA from here 4) how much does one want to pay for protection and is one alright giving up additional gains 5) does one need full protection (ie atm and to share price of zero or is one ok with an otm put and with protection ending at some price above zero). After developing the thesis, one can go about choosing a strategy that fits it as well as choosing appropriate strike and expiration periods. There is a trader who goes into detail about hedging appl stock in the aapl pdf. He went by the name of "Mace". Some common strategies utilized include:

1) Selling a covered call. Advantage: provides downside protection to a certain level Disavantage: upside is capped and protection only to the level of the premium received from selling the call
2) Buying a long put. Advantage: provides complete protection to zero Disadvantage: must add cost premium of the put to your share price basis
3) Zero cost collar (combination of 1 and 2) advantage: cost of full protection is zero with limited downside risk. Disadvantage: limited upside since a call was sold to finance the put purchase. You will notice that the risk graph of a collar is similar to a vertical spread.
4) Bear Put spread: Buy a put and sell a lower strike put with the same expiration. Advantage: cheaper than #2, but protection stops at the level of the put sold
5) Bear Put spread and sale of short call. advantage: even cheaper than #4 disadvantage protection stops at level of put sold and upside capped by call sold
6) sell 100 shares of tsla, replace with 1 long dated LEAP (depending on risk tolerance, can be DITM, or ATM or even OTM). advantage: takes money off the table disadvantage is the same with all naked calls: time decay, volatility crush, significant decrease in value should tsla crash.

 

[Ocelot]

Ocelot,

I think it is important to develop a thesis before any applying any options strategy. In the specific case of how to best hedge stock which has substantial gains, the questions one should ask, IMHO, before hedging should at least include the following: 1) how far of a correction does one anticipate 2) will the correction be short lived 3) is there significant upside to TSLA from here 4) how much does one want to pay for protection and is one alright giving up additional gains 5) does one need full protection (ie atm and to share price of zero or is one ok with an otm put and with protection ending at some price above zero). After developing the thesis, one can go about choosing a strategy that fits it. There is a trader who goes into detail about hedging appl stock in the aapl pdf. He went by the name of "Mace". Some common strategies utilized include:

1) Selling a covered call. Advantage: provides downside protection to a certain level Disavantage: upside is capped and protection only to the level of the premium received from selling the call
2) Buying a long put. Advantage: provides complete protection to zero Disadvantage: must add cost premium of the put to your share price basis
3) Zero cost collar (combination of 1 and 2) advantage: cost of full protection is zero with limited downside risk. Disadvantage: limited upside since a call was sold to finance the put purchase. You will notice that the risk graph of a collar is similar to a vertical spread.
4) Bear Put spread: Buy a put and sell a lower strike put with the same expiration. Advantage: cheaper than #2, but protection stops at the level of the put sold
5) Bear Put spread and sale of short call. advantage: even cheaper than #4 disadvantage protection stops at level of put sold and upside capped by call sold
6) sell 100 shares of tsla, replace with 1 long dated LEAP (depending on risk tolerance, can be DITM, or ATM or even OTM). advantage: takes money off the table disadvantage is the same with all naked calls: time decay, volatility crush, significant decrease in value should tsla crash.

wow. that is exactly why this forum is amazing. thank you so much for the detailed response.

I have no idea if a correction will happen. But, would I be surprised if the market tanks, to see Tesla trading in the 110-120 range? no. after all it was just over 2 months ago! If this does happen, and the economy does indeed decline, unfortunately I feel it will not be short lived, and actually could last in the 3-5 year range. Propping the economy by 85 billion a month in my humble opinion is just not sustainable. I read a quote that tapering shortens the fuse, while continuing it makes the bomb bigger, and I tend to agree with it. On the other hand I still beleive there is huge significant upside to Tesla, it is just not without risk of this upside not occurring for several years, if the economy does indeed tank, the recovery will be slow. I am glad Tesla has some cash in the bank, as they might have to weather a storm or two.

I do not want to give up gains, just limit downside. So I guess taking all this into consideration, I really like your option number 4, a bear put spread. This will cost a bit less and offer some protection. In fact I really need to delve a bit deeper into my thesis, and crunch some numbers, as if Tesla did indeed drop 30%, I would probably want to accumulate more. So indeed, have to figure out if buying PUTS would be better, or just saving that money to buy shares would be better.



Onga if you are ever on Vancouver Island, let me know and lunch is on me.
Once again thanks for the detailed response.
Ocelot

 

[ongba]

wow. that is exactly why this forum is amazing. thank you so much for the detailed response.

I have no idea if a correction will happen. But, would I be surprised if the market tanks, to see Tesla trading in the 110-120 range? no. after all it was just over 2 months ago! If this does happen, and the economy does indeed decline, unfortunately I feel it will not be short lived, and actually could last in the 3-5 year range. Propping the economy by 85 billion a month in my humble opinion is just not sustainable. I read a quote that tapering shortens the fuse, while continuing it makes the bomb bigger, and I tend to agree with it. On the other hand I still beleive there is huge significant upside to Tesla, it is just not without risk of this upside not occurring for several years, if the economy does indeed tank, the recovery will be slow. I am glad Tesla has some cash in the bank, as they might have to weather a storm or two.

I do not want to give up gains, just limit downside. So I guess taking all this into consideration, I really like your option number 4, a bear put spread. This will cost a bit less and offer some protection. In fact I really need to delve a bit deeper into my thesis, and crunch some numbers, as if Tesla did indeed drop 30%, I would probably want to accumulate more. So indeed, have to figure out if buying PUTS would be better, or just saving that money to buy shares would be better.



Onga if you are ever on Vancouver Island, let me know and lunch is on me.
Once again thanks for the detailed response.
Ocelot

Ocelot,

Also take a look at #6 and read "Mace's" comments in the pdf. I think it is also a very good strategy for hedging (replacing shares with LEAPS). If I am ever in your area I will look you up!

 

[sub]

Ocelot,

Also take a look at #6 and read "Mace's" comments in the pdf. I think it is also a very good strategy for hedging (replacing shares with LEAPS). If I am ever in your area I will look you up!

I saw the link to this .pdf in one of the threads but not sure where it is? I'm considering this same strategy, replacing my shares with leaps. This would allow me to pull out all my initial investment for now and let me profits run while keeping basically the same leverage. I've done a lot of reading on this but since i'm a newbie to options i'm not sure how the time decay works on leaps? I was looking at DITM Jan 15 leaps. I could roll them sometime in the next 6-9 months for another small cash outlaw and extend that out. I know others on the forums have leaps, I'm trying to figure out if this is a good strategy. Help!? I feel it's risk limiting on the downside, especially since I would be playing with house money, yet I still capture almost all of the upside and my return on investment is much higher, especially when considering I can use my original investment for something else.

 

[ongba]

I saw the link to this .pdf in one of the threads but not sure where it is? I'm considering this same strategy, replacing my shares with leaps. This would allow me to pull out all my initial investment for now and let me profits run while keeping basically the same leverage. I've done a lot of reading on this but since i'm a newbie to options i'm not sure how the time decay works on leaps? I was looking at DITM Jan 15 leaps. I could roll them sometime in the next 6-9 months for another small cash outlaw and extend that out. I know others on the forums have leaps, I'm trying to figure out if this is a good strategy. Help!? I feel it's risk limiting on the downside, especially since I would be playing with house money, yet I still capture almost all of the upside and my return on investment is much higher, especially when considering I can use my original investment for something else.

Sub,

Please send me a message with your email address and I will send you the pdf (I didn't develop the strategy, just compiled what I thought were the relevant posts, so hats off to past aapl traders, who were trailblazers for us). With regards to time decay on LEAPS such as Jan 15, if you go deep in the money (ie delta of 85 or 90) the time decay is minimal when we are so far out till expiration (17 months till Jan 15 I think) so the DITM LEAP will act as leveraged shares. The risk to long dated LEAPS is not time decay, but volatility. You can also recover some of the cost of the LEAP by selling calls against it and collect premium for the next 17 months, ideally reducing the cost basis of the DITM LEAP (ie like a covered call) to zero (although in reality, very difficult to sell 17 months worth of call and have them all expire worthless). See a trader by the name of "MTDOC" in the pdf as he used this strategy effectively on AAPL. Of course, DITM LEAPS are more expensive than ATM LEAPS (ie you would pull more of your investment out by selling shares, replacing with an ATM rather than DITM LEAP), but the risk is greater than with the DITM LEAP and it will be difficult to sell monthly calls against an ATM LEAP (b/c the deltas of the ATM LEAP vs. the OTM call are closer than the delta of the DITM LEAP and OTM call), therefore, if the stock price rises above the strike of the call sold, it is more difficult to extract yourself from the ATM LEAP than the DITM LEAP.

 

[sub]

will do on the pm as soon as i'm done with this response, thanks for taking the time. I knew I should have snagged that .pdf when I saw it posted the first time. I was looking at doing the 110 Jan15 leaps. The delta is .83 Would it work to pick up 5 leaps for every 400 shares I want to replace given that delta? The extra leap would make up for the lower return on the leap on the upside? I have read about selling covered calls on the leaps. One thing i'm still working out is what happens if those get called? I have to then buy those shares, seems risky?

 

[sleepyhead]

I have read about selling covered calls on the leaps. One thing i'm still working out is what happens if those get called? I have to then buy those shares, seems risky?

If that happens that means that TSLA went up a lot quicker than you expected. In that case you would close out both the long LEAPS and short call/LEAPS about a day or two before the option expiration date.

Since the stock has gone up so much you will then wait for a pullback to reastablish a new LEAPS position.

Remember when doing covered calls you still made money but limited your upside.

 

[ongba]

will do on the pm as soon as i'm done with this response, thanks for taking the time. I knew I should have snagged that .pdf when I saw it posted the first time. I was looking at doing the 110 Jan15 leaps. The delta is .83 Would it work to pick up 5 leaps for every 400 shares I want to replace given that delta? The extra leap would make up for the lower return on the leap on the upside? I have read about selling covered calls on the leaps. One thing i'm still working out is what happens if those get called? I have to then buy those shares, seems risky?

Sub,

Yes, having more LEAPS to replace the shares sold would lead to a higher gain (and higher loss) than doing a 1 for 1 replacement (ie 1 LEAP for 100 shares). IF you sell the monthly call against a long dated LEAP which is DITM (ie delta 85-90), and the price goes above the strike of the call sold, you can close out the entire spread, which should be profitable because the DITM has a higher delta than the monthly call sold, ie lets use 90 delta for the LEAP and 40 delta for the monthly call, so if tsla goes up 10 dollars, the LEAP should gain 9 dollars and the call should gain 4 dollars, so closing it out should still give you a net gain of $5, not taking into account time decay and volatility changes. You could also buy shares right below the strike price (if you have capital) to get called away once the call buyer exercises, but that, IMHO, is not ideal b/c you have to have a lot of capital (or margin) to buy shares to deliver, and it introduces extra risk (ie what happens if you buy the shares and tsla crashes before the sold call is exercised by your counterparty? The result would be 1) LEAPS with decreased value 2) shares with decreased value and 3) sold call going worthless (which is the only benefit).

EDIT: Sleepy beat me to it in a more eloquent and speedy reply

 

[sub]

thanks guys. I was out cycling since my last post and that is usually when I do most of thinking and came up with some thoughts. Is it correct, that if I buy a leap and write a call, If It is arranged with my broker, if my shares are called I can then call the shares that I control with my leap at the same time so I don't have to have the cash/shares to cover my leap? I believe I've read this but forgot about it.

Alternatively, If I were to close out both positions before the short call could be exercised, i'm assuming the short call would have gone up quicker than the leap? If not, that seems like the way to go. Close out and re-establish, seems like a good strategy.

How about this idea, sell shares and buy DITM leaps and sell OTM leaps? Brings down my cost basis but does limit my upside a bit. However, I think if I compared the upside to where I stand now owning just shares I still come out ahead if I buy maybe 2 more leaps than current shares owned?

My reasons for looking into alternate strategies is two fold. One, I wouldn't mind taking some of my initial investment out of the game without limiting my upside. I don't mind if I risk my remaining capital a bit more, while increasing my upside. My wife won't let me reduce our upside, can't blame her. If I can find a strategy that meets this while allowing me to pull out some capital I will be ordering a Model S if I can get the wife to agree with that. Our current newest car is 13 years old and isn't going to last much longer and I refuse to buy another ice vehicle, compounded by the fact that my wife just took a new job and is traveling 1000-1500 miles a month just for work. I'm uncomfortable with her being out on the road in that old car.

 

[InTheShadows]

From what I read in the AAPL doc I understand the construct for xyz stock as:

Today buy 1 jan 15 $100 c for $10

Xyz goes up,

10 days later sell 1 jan 15 $110 c for $11

You then get all your money back plus $100 so there is 0 downside risk but you have capped your upside to $1000

so when your upside gets to $800 you should sell your first position and buy your second and do the whole thing over again?

what would be the best way to ladder this, and what about creating a further spread based on market volatility? How would one do that?

 

[mershaw2001]

If It is arranged with my broker, if my shares are called I can then call the shares that I control with my leap at the same time so I don't have to have the cash/shares to cover my leap? I believe I've read this but forgot about it.


How about this idea, sell shares and buy DITM leaps and sell OTM leaps? Brings down my cost basis but does limit my upside a bit. However, I think if I compared the upside to where I stand now owning just shares I still come out ahead if I buy maybe 2 more leaps than current shares owned?

If you get assigned on the short call, you will be short 100 shares/contract and you can def ask for your broker to exercise the leap, but this is the wrong play. The leap has time premium, and by exercising it you lose the time premium value which would be significant. Instead, sell the leap and buy the stock to cover the short position you would have incurred by the actions of the other person (who exercised your short option and left you short tsla).

As for your second thought, do that only if you want to increase your tesla position via leverage, which it sounds like you want to do. You would want to do this if your assumption of the stock is that it will grow more than 10-20% in the next year. In general, if I could deploy more cash and eliminate time premium of my underlying stock/option that i own, and increase the time premium of the option that i am short, i will get a better spread and make more money from theta. I like that solution in general better than exposing myself entirely to stock movement, best to capture a little of both in my opinion. So I think you're better off not doing it and just selling covered calls on shares if you have the shares already- you keep the tax acquisition of the shares, putting you closer to long term cap gains, you get the margin requirements from the common stock (and options have no margin ability), and you don't have time decay associated with the ditm call because you have common shares. But yes, your plan would work for increasing your leverage.

 

[sub]

Thanks. I will have to read that over again a few times for it to compute Let me ask this then, I've thought about selling covered calls against my shares, but my concern is getting my shares called away. I guess If they get called away I can immediately rebuy and if the stock hasn't jumped significantly i'm ok, but this limits my upside for sure.

One last question (for now). When you sell covered calls is the money held back by your brokerage or can that money be taken and reinvested? Thanks.

Edit - forgot to add, I did some quick math and it really seems like buying one more Leap option than equivalent shares I own, then selling a Leap call at a price I would be ok with letting my shares go at and applying that to the cost of my leaps is not a bad idea. My downside is cut to 1/3 of what it is now, and my upside seems roughly 42% better. I can then sit back and let it run with the house money. I would probably acquire more shares here and there also. I think I would rather just sell one leap call and maybe make a bit less on that but not have to stress every month about getting called out. Thoughts?

 

[ongba]

thanks guys. I was out cycling since my last post and that is usually when I do most of thinking and came up with some thoughts. Is it correct, that if I buy a leap and write a call, If It is arranged with my broker, if my shares are called I can then call the shares that I control with my leap at the same time so I don't have to have the cash/shares to cover my leap? I believe I've read this but forgot about it.

Alternatively, If I were to close out both positions before the short call could be exercised, i'm assuming the short call would have gone up quicker than the leap? If not, that seems like the way to go. Close out and re-establish, seems like a good strategy.

How about this idea, sell shares and buy DITM leaps and sell OTM leaps? Brings down my cost basis but does limit my upside a bit. However, I think if I compared the upside to where I stand now owning just shares I still come out ahead if I buy maybe 2 more leaps than current shares owned?

My reasons for looking into alternate strategies is two fold. One, I wouldn't mind taking some of my initial investment out of the game without limiting my upside. I don't mind if I risk my remaining capital a bit more, while increasing my upside. My wife won't let me reduce our upside, can't blame her. If I can find a strategy that meets this while allowing me to pull out some capital I will be ordering a Model S if I can get the wife to agree with that. Our current newest car is 13 years old and isn't going to last much longer and I refuse to buy another ice vehicle, compounded by the fact that my wife just took a new job and is traveling 1000-1500 miles a month just for work. I'm uncomfortable with her being out on the road in that old car.

Sub,

There is really no need to exercise your long call in order to obtain shares to cover the short call which is now in the money. Just close out both legs of the spread. IF done correctly, it will result in a profit. Re-read the posts by sleepyhead at 3:47 pm and my own post at 3:49 pm. This strategy is really just a covered call "on steroids" as one trader once told me. The only risk is the same with a covered call (ie tsla tanks far below the strike of the long call you own and you are unable to sell calls at a reasonable strike so, hence are stuck waiting for the price to recover). The added danger with options, as opposed to shares are, IMHO, twofold: 1) the paper loss of your LEAP will be magnified when compared to shares because of the leverage of options 2) you have unlimited time with shares to allow price to recover. Unfortunately, that is not true with options, even two year LEAPS, as there is an expiration date. So the conservative approach to this strategy is to buy LEAPS Deep in the money. There is a book on LEAPS by Marc Allaire entitled "Understanding LEAPS" which is very good at explaining LEAPS and the various strategies that can be utilized with them. It is very dry, but the best book I have found on LEAPS. It is available on amazon in both physical form and for the kindle reader.

 

[mershaw2001]

Your concern over selling covered calls with tesla is completely founded. I was on the wrong side of that trade at the Q1 bump when I had sold calls at 80 strike and it went to 90. I immediately dumped more cash in and rolled them up to 105, which was a good idea but I really should have bought them back because when it hit 105, I had to roll them up to 120. And when it was 120, I just gave up and bought them back completely. Each time i buy back and sell the next one up, I'm paying approx 50% of the gains that I would have had if i didn't sell the covered calls. I think you should sell covered calls. I just am giving you an example of how it doesn't always work well. I think you should sell covered calls NOT when the stock is static, but when it's rising like crazy and you want to sell the stock. Instead, sell the covered call as a proxy for selling the stock at the time you'd consider selling the stock. It gives you additional upside, and if the stock goes down you walk away with some cash from the call.

The money from a covered call is deposited in your account. If you have borrowed significant margin debt, for the purposes of reg T and fed calls, this offsets some fed call requirements immediately. However, for all other purposes, your broker ties up the money from the sale of the call by putting a -1 call placeholder with a value equivalent to the market bid in your account. Until that disappears, it is tying up cash in your account. As it decays it ties up less value, i believe.

I like your plan. It sounds excellent. Buy more leaps than you have shares, and then for a fraction of them offset the price by making it a spread.

 

[ongba]

From what I read in the AAPL doc I understand the construct for xyz stock as:

Today buy 1 jan 15 $100 c for $10

Xyz goes up,

10 days later sell 1 jan 15 $110 c for $11

You then get all your money back plus $100 so there is 0 downside risk but you have capped your upside to $1000

so when your upside gets to $800 you should sell your first position and buy your second and do the whole thing over again?

what would be the best way to ladder this, and what about creating a further spread based on market volatility? How would one do that?

Your understanding of the delayed construct spread is correct. You have zero risk and a chance at $1000 in your example. Most conservative traders (or those who have been burned several times, experiencing an 80% paper gain evaporate to zero) will close out at 80-90% (or $800-$900 in your example) of maximum value as the thinking is it is not worth holding for the additional 10-20% while exposing yourself to a black swan event. A lot of traders also will not carry the trade to expiration. They will roll out somewhere between 1-3 months prior to expiration (assuming the trade was placed with 1 or 2 year LEAPS). The best way to ladder is to create several spreads of different strikes and expiration dates, never placing all your eggs in 1 expiration period. The safest way to re-enter is to be patient and let the market/tsla correct before constructing a new spread. Remember, the most successful aapl players from the PDF were the ones who were investors using LEAPS as the 21st century equivalent of leveraged shares, not the short term traders trading front month options.

 

[gym7rjm]

Your understanding of the delayed construct spread is correct. You have zero risk and a chance at $1000 in your example. Most conservative traders (or those who have been burned several times, experiencing an 80% paper gain evaporate to zero) will close out at 80-90% (or $800-$900 in your example) of maximum value as the thinking is it is not worth holding for the additional 10-20% while exposing yourself to a black swan event. A lot of traders also will not carry the trade to expiration. They will roll out somewhere between 1-3 months prior to expiration (assuming the trade was placed with 1 or 2 year LEAPS). The best way to ladder is to create several spreads of different strikes and expiration dates, never placing all your eggs in 1 expiration period. The safest way to re-enter is to be patient and let the market/tsla correct before constructing a new spread. Remember, the most successful aapl players from the PDF were the ones who were investors using LEAPS as the 21st century equivalent of leveraged shares, not the short term traders trading front month options.

So wouldn't the delayed construct spread be a perfect strategy right now? With all the volatility one could likely enter into the zero risk $5 or $10 spread almost every day. You could take $10k and instead of dumping that into 3 or 4 otm leaps you continually set up zero cost spreads over the course of the next several months, potentially setting up several times that number.

Is this a difficult strategy? The downside is that you get caught with a dip and you can't sell the call to cover the cost of the initial call bought. But with Leaps you have more time on your side. Plus, if you were already intending to purchase leaps then the risk was already inherent.