So kenliles, when you have your stock replacement strategy going forward it assumes steady growth over time so that you can roll up and out the LEAPs as they get nearer or ITM. On obvious peaks one might also convert them to stocks etc. But let's assume you thought the market correction was temporary, but now are starting to guess that it may be a bigger and longer correction. What do you do? Just bite the bullet taking the LEAP losses for the nearer year and moving that to stocks? Or just ignore? As if this slump and correction takes ~ half a year, then it will impact the LEAPs significantly and they need to recover far higher to get back to the same cost basis...
yep- this is the toughest call for Bullish on a stock while Bearish on the market (ala Apple in 2008). If you really believe the market is correcting for the next months (and TSLA with it as we've seen), then it depends on how you've structured the LEAPS relative to the time frame of that market correction.
The goal is to protect the 'stock' position over the long haul, but realize a higher return than the stock position would generate.
Option 1: Simply move back to stock over the market-bleed-time (especially if you are completely uncertain as to the Bearish time frame induced by the market). I've done that before as a protective move against uncertainty- that's where THIS market correction is a tough call because it's not economically generated. In fact most of the forward look is a growing GDP etc. This market correction is one born of the financial ilk- a wall street rotation (that could lead to a bear market in general).
That leads to Option 2 - if you believe this market downslide (and TSLA with it in some %) is going to carry beyond where you would roll those first leg LEAPS (J15) June-Sept, then roll them now out to J16 at a lower strike than your current J16s - That allows the time value to bleed much slower while holding, but maintains the stock equivalent position- so you're carrying only J16s but at 3 strikes (you may be lowering your total Delta track range- which is probably fine while in this Bearish mode anyway). If you're wrong and it moves up sooner, your gains will be reduced, commensurate with the reduced risk level- you'll still carry more gains than a pure stock position. Keep in mind it's a strike that you're aiming for 6 months before J16 expiration- your target strike from current TSLA values (which would likely be lower than your current J16s with this downturn in place).
That leads to Option 3 - This is the one I usually take on these kind of corrections. Under the same market assumptions as Option 2 above, but with a stronger conviction of it's occurrence; exit your J15s now, but to cash; then hold the cash for the eventual roll into the J16 position (at a better cost or strike target since the market has pulled TSLA back as you predicted - same as reducing TSLA position for a period of time);
--Here's the added advantage if the timing works - the J17s will come up November-ish. If the market downturn continues until then use the cash to create that leg directly at a much lower cost (again sine TSLA has moved down)- that's a long time to be bearish from here though; But it does afford that possibility--
That leads to Option 4
If you believe the downturn (recession driven or otherwise) is so severe and prolonged that you'll now never reach your current J16 strikes or anywhere close, then that's sort of a recipe for being out of the market altogether, but short of that, bring your strikes down to new lower strikes with a smaller position (more bearish on TSLA than before- just like lowering a stock position) or add some cash to lower the strike if you think it's in a recovery time frame. Overall it really doesn't work much different than a stock position for this kind of market-driven price performance
Now one thing I want to make crystal clear-
LEAPS-for-stock can easily be mis-used to over leverage and provide losses (just like too much stock). It's very easy to assign a dollar value of LEAP position as equal to a dollar value of stock- it is not of course. Be sure to keep your LEAP position congruent with the stock position (via Delta tracking) that you are comfortable risking on a 1-2 year time frame. If you're doing that- it's no different than holding the stock (and losing value on these downturns)- it's the fact you have fewer $s at risk, coupled with an ALWAYS-roll-before-expiration that creates the higher return/risk ratio on a growing stock. But that's disabled if you simply leverage to a higher position than the stock would have normally carried. The LEAP position equivalent to stock will afford a cash position that stock would not.
