LEAP Calls and Puts

[NilesMike]

As suggested, here is a current strategy of using LEAPS with dividend aristocrat type stocks.

1. I search http://ycharts.com/companies/KO/dividend_yield for stocks on my list that are at the upper or lower end of their 5 year yield.

2. Off that list I go to the option chain and see what open interest looks like 6 months out (May 14 Options).

3. I find an option with a 70+ Delta, it captures 70% of the stocks' price move, and buy that option.

4. Wait for stock to rotate back toward the other end of the yield range and sell the option.

Risk is what is paid for the option which if stock doesn't move in 6 months, it will expire worthless. 6 months appears to be sufficient for these types of stocks to rotate away from the yield side that you bought it at.

[Kerim]

That sounds simple enough. You've had good success that way? Does one bad trade wipe out a whole bunch of good ones?

[NilesMike]

No, one bad trade doesn't wipe out many good trades. Say one option costs $500, I look for a $500 gain. Usually within 6 months that is attainable somewhere in that time frame.

If the stock price goes the wrong way, your max loss would be $500 and that rarely happens. Many times the option still has some value near expiry, like 100-250.

One does not get keep any dividends paid over that period however, in this part of my portfolio I do not exercise the option and take ownership of the stock, it is strictly an income generating component of my portfolio.

[TomK]

What site do you use to check those out? I'm not sure I've seen delta listed at places like yahoo.

I could see this approach making sense if the stock is near the edge of its range for what seems to be a temporary reason, such as if a great stock has a bad quarter or something. But where the market generally is moving upwards consistently, then many great stocks will be moving along with it and it would seem a much riskier bet that it would revert to its average. What do you think?

Thanks!

[NilesMike]

(11-13-2013, 03:43 PM)TomK Wrote: What site do you use to check those out? I'm not sure I've seen delta listed at places like yahoo.

I could see this approach making sense if the stock is near the edge of its range for what seems to be a temporary reason, such as if a great stock has a bad quarter or something. But where the market generally is moving upwards consistently, then many great stocks will be moving along with it and it would seem a much riskier bet that it would revert to its average. What do you think?

Thanks!

I use Think or Swim for the options and my directional bias is based on where the stock is in its dividend yield range.

This past 2 weeks I have been long: MCD, IBM, TGT and CVX, still in MCD (+15%) the others have been closed for 21%+@

Shorts are: ADM, BA, NKE, TJX, none are in the green yet.

[Kerim]

If Cisco opens in the morning as far down as it has been after hours, I may put a few spare dollars into some bullish calls. It just feels like a big overreaction to me.

[NilesMike]

(11-13-2013, 08:24 PM)Kerim Wrote: If Cisco opens in the morning as far down as it has been after hours, I may put a few spare dollars into some bullish calls. It just feels like a big overreaction to me.

Maybe an APR14 call with 18 strike price? Should cost around $4.15 at the open.