Rolling LEAPS?

[ggr]

I have a bunch of 2018 LEAPS of various strikes. Some of the common wisdom here seems to be that around now is the right time to "roll" them into 2019 LEAPS. They're mostly deep ITM. I've never explicitly rolled them before, usually I have let them expire and convert, then hold for long term gains.

So I'm asking, what is the formula or guideline for rolling them over? Try to match values, number of contracts, what?

For concreteness, I have strikes at $150, $260, $270, $300, all with significant gains since purchase.

(Note, I will make my own decisions, and be responsible for them, in any case. Any contributions to this thread will be for information purposes for me and others only.)

 

[doctoxics]

I have a bunch of 2018 LEAPS of various strikes. Some of the common wisdom here seems to be that around now is the right time to "roll" them into 2019 LEAPS. They're mostly deep ITM. I've never explicitly rolled them before, usually I have let them expire and convert, then hold for long term gains.

So I'm asking, what is the formula or guideline for rolling them over? Try to match values, number of contracts, what?

For concreteness, I have strikes at $150, $260, $270, $300, all with significant gains since purchase.

(Note, I will make my own decisions, and be responsible for them, in any case. Any contributions to this thread will be for information purposes for me and others only.)

Since you are deep in the money, I like holding your '18 leaps at least through the Model 3 ramp this fall. If you convert to '19 leaps now, you trade a lot of your leverage for the extra year. A compromise might be to keep the deeper '18s and convert the rest to '19s at higher strike prices to maintain the same number of contracts. Just an idea; not investment advice.

 

[durkie]

agreed! i'd like to know about a bit more about this too. i'm curious about the tax treatment in the US. on the surface rolling seems like kind of an expensive move since you'd have to realize all of your gains on the option in order to move everything forward a year.

 

[neroden]

This is definitely "build a spreadsheet with different scenarios using your personal tax situation" stuff. You also have some decisions to make: are you trying to raise leverage? Lower leverage? Will you have cash to execute some of these in 2018 (in which case you could defer taxes forever?)

 

[luvb2b]

@ggr:

as you have mentioned nothing on tax consequences, i will assume there are not any.

here's what i would do:
the jan 18 150's have very little time premium ($1-1.50). note: the time premium in the calls is approximated well by the price of the puts, assuming dividends are zero and cost to borrow for shorting is very low.
the jan 18 300's have lots of time premium ($17-18).
the jan 18 270's have $10-11 of time premium, 260's have $8-10.

the 250 will be a relatively more liquid strike due to being a round number. the jan 250s have premium of $7-9.

so one thing i would be doing is just within the 2018's is rolling up $150s and rolling down 300's. for example: if you roll 10 150c into 250c it will cost you $7 additional in time premium. if you roll 10 300c into 250c you will save around $10 in time premium. the next savings in cost to carry will be $3 each for 20 contracts, and the amount of capital you have at risk will decline by an average of $50 per contract: you'll have $43 more at risk on the 250c vs. the 300c, but you'll have $93 less in risk going up from 150c to 250c. less risk, same exposure, less cost to carry. that part is easy.

if it were possible, i would try to consolidate the myriad 2018 positions into a single liquid strike like the 250s.

for rolling into the 2019s, generally i find it is better to wait for one of the following conditions:
1. local high price, which reduces the cost to roll forward deep in the money calls at the same strikes. i don't think tesla can peak until you see a day where it is up at least 8-10%. so i would wait for that day before i rolled. that may be why so many people are rolling now.
2. closer to expiration costs less usually. the 2019s could behave a little different due to the long duration, but one thing you can do is keep track of the spread daily and see if indeed it is going down as expiration draws nearer. this is much easier to do if you are in a single strike. right now i feel 2019s have huge premiums. you might see these come lower in december when holiday low-volume trading causes implied volatilities to contract a bit.

the current price is see to roll 250c forward a year is around $18. for the $300s it's $26.

i would prefer to keep my current contract exposure and adjust strikes to keep the amount of invested capital the same or less when i did the roll. for example: i might roll jan 18 250c into jan 19 300c on a 1-1 basis, and take some cash out.

couple other tricks that are useful for execution purposes:
1. always enter the roll order as a combined spread, so you avoid bid / ask on both sides. for example: "sell to close jan 18 150c and simultaneously buy to open jan 250c at a combined credit of $x". some brokers like fidelity have online order entry for these combined orders. most others you have to call the trading desk.
2. i prefer to start the price far away in my favor from the midpoint, and then slowly work it closer. in options with wide spreads sometimes the midpoint is not the "true midpoint". by starting at a farther away price (in your favor) and working slowly closer, you make sure you're not fat-fingering the trade at a bad price.
3. for wide spreads i may start with a 5 or 10 lot. once i know where the price is supposed to be based on my executions then i will go with the larger order.

the other tricks i would use are not feasible due to inordinately high premiums in the 2019s.

 

[ggr]

@ggr:
here's what i would do:

Thanks. That makes a lot of sense, and is the kind of reply I was hoping for.

 

[EinSV]

@ggr:

as you have mentioned nothing on tax consequences, i will assume there are not any.

here's what i would do:
the jan 18 150's have very little time premium ($1-1.50). note: the time premium in the calls is approximated well by the price of the puts, assuming dividends are zero and cost to borrow for shorting is very low.
the jan 18 300's have lots of time premium ($17-18).
the jan 18 270's have $10-11 of time premium, 260's have $8-10.

the 250 will be a relatively more liquid strike due to being a round number. the jan 250s have premium of $7-9.

so one thing i would be doing is just within the 2018's is rolling up $150s and rolling down 300's. for example: if you roll 10 150c into 250c it will cost you $7 additional in time premium. if you roll 10 300c into 250c you will save around $10 in time premium. the next savings in cost to carry will be $3 each for 20 contracts, and the amount of capital you have at risk will decline by an average of $50 per contract: you'll have $43 more at risk on the 250c vs. the 300c, but you'll have $93 less in risk going up from 150c to 250c. less risk, same exposure, less cost to carry. that part is easy.

if it were possible, i would try to consolidate the myriad 2018 positions into a single liquid strike like the 250s.

for rolling into the 2019s, generally i find it is better to wait for one of the following conditions:
1. local high price, which reduces the cost to roll forward deep in the money calls at the same strikes. i don't think tesla can peak until you see a day where it is up at least 8-10%. so i would wait for that day before i rolled. that may be why so many people are rolling now.
2. closer to expiration costs less usually. the 2019s could behave a little different due to the long duration, but one thing you can do is keep track of the spread daily and see if indeed it is going down as expiration draws nearer. this is much easier to do if you are in a single strike. right now i feel 2019s have huge premiums. you might see these come lower in december when holiday low-volume trading causes implied volatilities to contract a bit.

the current price is see to roll 250c forward a year is around $18. for the $300s it's $26.

i would prefer to keep my current contract exposure and adjust strikes to keep the amount of invested capital the same or less when i did the roll. for example: i might roll jan 18 250c into jan 19 300c on a 1-1 basis, and take some cash out.

couple other tricks that are useful for execution purposes:
1. always enter the roll order as a combined spread, so you avoid bid / ask on both sides. for example: "sell to close jan 18 150c and simultaneously buy to open jan 250c at a combined credit of $x". some brokers like fidelity have online order entry for these combined orders. most others you have to call the trading desk.
2. i prefer to start the price far away in my favor from the midpoint, and then slowly work it closer. in options with wide spreads sometimes the midpoint is not the "true midpoint". by starting at a farther away price (in your favor) and working slowly closer, you make sure you're not fat-fingering the trade at a bad price.
3. for wide spreads i may start with a 5 or 10 lot. once i know where the price is supposed to be based on my executions then i will go with the larger order.

the other tricks i would use are not feasible due to inordinately high premiums in the 2019s.

This is extremely helpful -- thank you. I am relatively new to options and recently rolled up some J18 and J19 125s/150s to J19 200s. Next time I do this your post will help me avoid at least three mistakes I made the last time around.

 

[ongba]

@ggr:

as you have mentioned nothing on tax consequences, i will assume there are not any.

here's what i would do:
the jan 18 150's have very little time premium ($1-1.50). note: the time premium in the calls is approximated well by the price of the puts, assuming dividends are zero and cost to borrow for shorting is very low.
the jan 18 300's have lots of time premium ($17-18).
the jan 18 270's have $10-11 of time premium, 260's have $8-10.

the 250 will be a relatively more liquid strike due to being a round number. the jan 250s have premium of $7-9.

so one thing i would be doing is just within the 2018's is rolling up $150s and rolling down 300's. for example: if you roll 10 150c into 250c it will cost you $7 additional in time premium. if you roll 10 300c into 250c you will save around $10 in time premium. the next savings in cost to carry will be $3 each for 20 contracts, and the amount of capital you have at risk will decline by an average of $50 per contract: you'll have $43 more at risk on the 250c vs. the 300c, but you'll have $93 less in risk going up from 150c to 250c. less risk, same exposure, less cost to carry. that part is easy.

if it were possible, i would try to consolidate the myriad 2018 positions into a single liquid strike like the 250s.

for rolling into the 2019s, generally i find it is better to wait for one of the following conditions:
1. local high price, which reduces the cost to roll forward deep in the money calls at the same strikes. i don't think tesla can peak until you see a day where it is up at least 8-10%. so i would wait for that day before i rolled. that may be why so many people are rolling now.
2. closer to expiration costs less usually. the 2019s could behave a little different due to the long duration, but one thing you can do is keep track of the spread daily and see if indeed it is going down as expiration draws nearer. this is much easier to do if you are in a single strike. right now i feel 2019s have huge premiums. you might see these come lower in december when holiday low-volume trading causes implied volatilities to contract a bit.

the current price is see to roll 250c forward a year is around $18. for the $300s it's $26.

i would prefer to keep my current contract exposure and adjust strikes to keep the amount of invested capital the same or less when i did the roll. for example: i might roll jan 18 250c into jan 19 300c on a 1-1 basis, and take some cash out.

couple other tricks that are useful for execution purposes:
1. always enter the roll order as a combined spread, so you avoid bid / ask on both sides. for example: "sell to close jan 18 150c and simultaneously buy to open jan 250c at a combined credit of $x". some brokers like fidelity have online order entry for these combined orders. most others you have to call the trading desk.
2. i prefer to start the price far away in my favor from the midpoint, and then slowly work it closer. in options with wide spreads sometimes the midpoint is not the "true midpoint". by starting at a farther away price (in your favor) and working slowly closer, you make sure you're not fat-fingering the trade at a bad price.
3. for wide spreads i may start with a 5 or 10 lot. once i know where the price is supposed to be based on my executions then i will go with the larger order.

the other tricks i would use are not feasible due to inordinately high premiums in the 2019s.

Luvb2b,

This was a very helpful response. Do you ever employ the strategy of selling same expiration calls against your existing calls to take all of your initial risk capital off the table and create a risk free spread? Ie lets using the above Jan 18 150 calls as an example. Say the calls were initially bought for $150 and now one can sell the Jan 18 300 call for $150 thus getting the full $150 initial capital back and creating a zero cost basis Jan 18 150-300 bull call spread with potential for $150 gain if held to expiration and thus a 100% gain. The advantages I see are 1) it allows one to participate in further upside gains (albeit slower than the the straight call) while having the initial risk capital in cash to deploy again if there is a drop. 2) It also allows one to deploy the capital again and hopefully create another risk free spread should the stock continue to rally (ie recycling the same $150 risk capital again and again, especially useful for longer dated LEAPS). The only downside is 1) holding to near expiration to capture the full value of the spread (although one could always sell much earlier than expiration for a smaller profit) and 2) slower gains dues to the nature of spreads. Appreciate any input you may have.

 

[luvb2b]

i dont' like complicating matters by spreading, as a general rule. if i felt i wanted to reduce risk, i would sell some of the position or roll up in strike or forward in time.

for example at this time with such small time premium left it makes little sense to me to hold jan 18 150 calls. i would roll up maybe even all the way to jan or sept. 250c or 300c. the reason i mention september is that you pay less time premium, and if the stock stays well in the 300s you can roll into december or january later.

i also feel like spreading creates some hidden risks that are not well understood. in 2013 for example doing this sort of thing with deep in the money calls that were close to expiration would have resulted in the calls being exercised early, your account being short a bunch of tesla as a result of the exercise, and if the counterparty timed properly, you may have to pay the short interest for 3 days (around 75% annualized) at the minimum!

in volatile markets you will usually find it's easier to execute single legs than spreads too.

Luvb2b,

This was a very helpful response. Do you ever employ the strategy of selling same expiration calls against your existing calls to take all of your initial risk capital off the table and create a risk free spread? Ie lets using the above Jan 18 150 calls as an example. Say the calls were initially bought for $150 and now one can sell the Jan 18 300 call for $150 thus getting the full $150 initial capital back and creating a zero cost basis Jan 18 150-300 bull call spread with potential for $150 gain if held to expiration and thus a 100% gain. The advantages I see are 1) it allows one to participate in further upside gains (albeit slower than the the straight call) while having the initial risk capital in cash to deploy again if there is a drop. 2) It also allows one to deploy the capital again and hopefully create another risk free spread should the stock continue to rally (ie recycling the same $150 risk capital again and again, especially useful for longer dated LEAPS). The only downside is 1) holding to near expiration to capture the full value of the spread (although one could always sell much earlier than expiration for a smaller profit) and 2) slower gains dues to the nature of spreads. Appreciate any input you may have.

 

[MitchJi]

Since you are deep in the money, I like holding your '18 leaps at least through the Model 3 ramp this fall. If you convert to '19 leaps now, you trade a lot of your leverage for the extra year. A compromise might be to keep the deeper '18s and convert the rest to '19s at higher strike prices to maintain the same number of contracts. Just an idea; not investment advice.

That's an extremely risky strategy! High risk, high reward. If there's a 2-4 month problem with the M3 ramp you could be wiped out. Buying leaps is one thing, keeping them until they become monthlies is fine for 5-10 percent of your portfolio. But doing that with a substantial portion of your portfolio is a little bit crazy.

@neroden it's don't think that this is an appropriate sit-ups for a spreadsheet . It's about risks.

For selecting strikes I'd use exactly the same criteria as you'd use if you were making purchases now. Personally I'd go with higher strike prices than you have now, assuming that you are extremely confident about the immediate future of TSLA.

Edit Addition:
It's always better to roll ITM Calls out in time when the price is higher.

 

[moe.salih]

It's always better to roll ITM Calls out in time when the price is higher.

Not always. That's only correct if you keep the same strike (or increase it by a small amount) which means you reduce leverage. If you're increasing your strike enough that means your new leverage might be higher than before. Which is good to do when the price is lower.

The point is that you HAVE to know the leverage of every option you buy and sell. I think this is one of the most misunderstood concepts about options.

 

[MitchJi]

Not always. That's only correct if you keep the same strike (or increase it by a small amount) which means you reduce leverage. If you're increasing your strike enough that means your new leverage might be higher than before. Which is good to do when the price is lower.

The point is that you HAVE to know the leverage of every option you buy and sell. I think this is one of the most misunderstood concepts about options.

By leverage you mean delta? Because in your post about J19 $680's to determine leverage you need to consider the price of the options as well as the deltas.

Thank You! I'd never considered the case of rolling out leaps to leaps with a substantially higher strike price.

Some information:
Normally options with lower strike prices have higher deltas.

If the options are ITM or OTM has a big impact on that.

The delta of ITM shorter term calls is always higher than longer term ITM calls at the same strike price. When rolling Leaps you'd need to roll to a significantly lower strike price to overcome that difference.

But for OTM calls it's always less. So there might not be a best time to roll those?

And gamma the is greater for shorter term options.

 

[moe.salih]

By leverage you mean delta? Because in your post about J19 $680's to determine leverage you need to consider the price of the options as well as the deltas.

Thank You! I'd never considered the case of rolling out leaps to leaps with a substantially higher strike price.

Some information:
Normally options with lower strike prices have higher deltas.

If the options are ITM or OTM has a big impact on that.

The delta of ITM shorter term calls is always higher than longer term ITM calls at the same strike price. When rolling Leaps you'd need to roll to a significantly lower strike price to overcome that difference.

But for OTM calls it's always less. So there might not be a best time to roll those?

And gamma the is greater for shorter term options.

No, I'm talking about leverage, which is calculated based on delta and the option price. You have to calculate the actual leverage value to know if it's going up or down. Only looking at the delta is not enough.

I made a spreadsheet to illustrate, this automatically calculates leverage for the listed strikes and expiries:

If you roll forward at the same strike, leverage goes down, which is good to do at a higher share price.

But if the share price is low and you want to roll forward, just pick a higher strike that causes the leverage value to increase. But sometimes that's not possible if your leverage is already high enough.

 

[justdoit]

Lots of useful information, thanks everyone.

I've also been waiting to use any pull backs to increase leverage by rolling up some LEAPS. For example, I've been looking to roll up my Jan 250 calls to Jan 400 calls. I can do that by buying 2 or 3 Jan 400 calls for every 1 Jan 250c I sell and still be left with some cash.

This is great for me because I think we still have some room to run and want to increase leverage but also have some cash on the side in case it's needed later.

 

[MitchJi]

No, I'm talking about leverage, which is calculated based on delta and the option price. You have to calculate the actual leverage value to know if it's going up or down. Only looking at the delta is not enough. I made a spreadsheet to illustrate, this automatically calculates leverage for the listed strikes and expiries:


If you roll forward at the same strike, leverage goes down, which is good to do at a higher share price.

But if the share price is low and you want to roll forward, just pick a higher strike that causes the leverage value to increase. But sometimes that's not possible if your leverage is already high enough.

Not if the options you are rolling from are OTM.

 

[luvb2b]

@MitchJi - you gave me my first disagree on tmc ever!
curious what you disagreed with in my post, i could quite tell from your reply.

That's an extremely risky strategy! High risk, high reward. If there's a 2-4 month problem with the M3 ramp you could be wiped out. Buying leaps is one thing, keeping them until they become monthlies is fine for 5-10 percent of your portfolio. But doing that with a substantial portion of your portfolio is a little bit crazy.

@neroden it's don't think that this is an appropriate sit-ups for a spreadsheet . It's about risks.

For selecting strikes I'd use exactly the same criteria as you'd use if you were making purchases now. Personally I'd go with higher strike prices than you have now, assuming that you are extremely confident about the immediate future of TSLA.

Edit Addition:
It's always better to roll ITM Calls out in time when the price is higher.

 

[MitchJi]

@MitchJi - you gave me my first disagree on tmc ever!
curious what you disagreed with in my post, i could quite tell from your reply.

I didn't intend to leave feedback. I must have hit the feedback button by mistake, when trying to scroll using my tablet.

I just removed it. Sorry!

 

[MitchJi]

No, I'm talking about leverage, which is calculated based on delta and the option price. You have to calculate the actual leverage value to know if it's going up or down. Only looking at the delta is not enough.

I made a spreadsheet to illustrate, this automatically calculates leverage for the listed strikes and expiries:

View attachment 232093

If you roll forward at the same strike, leverage goes down, which is good to do at a higher share price.

But if the share price is low and you want to roll forward, just pick a higher strike that causes the leverage value to increase. But sometimes that's not possible if your leverage is already high enough.

Thank you!

 

[bdy0627]

Lots of useful information, thanks everyone.

I've also been waiting to use any pull backs to increase leverage by rolling up some LEAPS. For example, I've been looking to roll up my Jan 250 calls to Jan 400 calls. I can do that by buying 2 or 3 Jan 400 calls for every 1 Jan 250c I sell and still be left with some cash.

This is great for me because I think we still have some room to run and want to increase leverage but also have some cash on the side in case it's needed later.

From the responses in this thread, it sounds like it would be disadvantageous for you to wait for a pullback to sell your 250s. Wouldn't you be better off selling them with the share price up? Then buy your 400s on a down day?

 

[bdy0627]

i dont' like complicating matters by spreading, as a general rule. if i felt i wanted to reduce risk, i would sell some of the position or roll up in strike or forward in time.

for example at this time with such small time premium left it makes little sense to me to hold jan 18 150 calls. i would roll up maybe even all the way to jan or sept. 250c or 300c. the reason i mention september is that you pay less time premium, and if the stock stays well in the 300s you can roll into december or january later.

i also feel like spreading creates some hidden risks that are not well understood. in 2013 for example doing this sort of thing with deep in the money calls that were close to expiration would have resulted in the calls being exercised early, your account being short a bunch of tesla as a result of the exercise, and if the counterparty timed properly, you may have to pay the short interest for 3 days (around 75% annualized) at the minimum!

in volatile markets you will usually find it's easier to execute single legs than spreads too.

Great info on LEAPs. This is really helpful for me. Could you explain what you mean by reducing risk by rolling up in strike? I understand rolling forward in time would reduce risk. If you roll up in strike, aren't you increasing leverage albeit with less money? It would be more volatile. Are you simply referring to having less money at risk since those options are cheaper even though you would experience a greater percentage loss of your investment in a dip?