Rolling LEAPS?

[luvb2b]

this -> 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

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?

 

[luvb2b]

just to expand on that thought a bit: one idea that's good to keep in mind is the idea of getting the most possible exposure in shares at the least possible carry cost (i.e., time premium) with the lowest possible dollars invested, subject to your own requirements.

practically there will be tradeoffs amongst those 3 factor (exposure/# of contracts, cost of carry, and capital outlay). for example, the 250 call gives you lower capital outlay vs. the 150 call, but it has a slightly higher cost of carry. you could buy more contracts of the 250 with the same amount of money as you could the 150.

the balancing act here is that you may find the 2 options have very similar cost of carry (the time premium part): for example the 250 might have $2 of carry and the 150 call only $1. however the 250 has much less capital outlay (what i call capital at risk) than the 150. it may be worth it to protect $100 per contract, or keep that in your pocket and sacrifice the extra $1 of time premium. although you may lose more percentage-wise in the 250's, the total loss for the same number of contracts is likely to be very similar or possibly even less than in the 150s.

i recently made one of these adjustments. i was in some 6/30 350c which had about 25c of time premium. at the time i looked the 6/30 360c had about 80c of time premium. given the bearish tone this week, i decided to pay the 65c in time premium while taking $10 in capital off the table. i maintain the same number of contracts so if the stock reverses my upside exposure remains very similar.

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?

 

[bdy0627]

Thanks for the explanation. There are a lot of angles to consider with these options.

 

[Wenche]

My kind of rolling leaps; I buy one year forward, when I think the price is low. Like today I bought a J19 150 Call for 217, I expect to sell one of my J18 160 calls for at least 225 in the near future. That way I gain $8 + one yesr more.

 

[neroden]

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:

This is lambda, right?

I assume this is primarily useful for long calls?

Lambda calculation should be symmetric for a short put, but I'm not sure how helpful it is, since you get paid upfront and buy it back later for a short put, so it's not really telling you your leverage.

One of the problems is that this is fundamentally a short-term calculation. If you expect your call to go from Deep Out of the Money to Deep In the Money, the delta changes will be massive over the time period. As with my $300 strike 2019 calls, bought when TSLA was at $180. The delta went from nearly 0 to nearly 1 over six months. Based on my expectation that the options would go from DOTM to DITM, it seemed more meaningful to me to calculate the leverage in a different manner.

 

[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.

I believe it's you divide the SP by the options price, then multiply by the delta?

Thanks! You are my hero! That's extremely useful to know that when you are rolling options (is a high SP better or a lower SP better when rolling those particular options?).

It's likely to change, particularly if one or both of the options shifts from OTM, or ITM after you do the calculations.

I bet that the reason that higher strike prices didn't always have more leverage is due to the "volatility smile". IV's are higher the further they are from ATM. In any case I don't believe it's important when choosing which option to buy, unless it's for a very short term play, because the delta's are constantly shifting.

 

[bdy0627]

Looking for feedback on rolling up in strike price on J19s in a dip. Specifically, selling some $200s and buying $300s for more leverage. Bad idea if the stock drops, more profit if the stock rises. It looks like 10% increased profit if the stock price gets to $350 by early August. Only 6% increased profit if it takes until October to get to $350. There might be some other considerations here in terms of paying premiums again. Thoughts on this? Is there an inherent reason why this is generally not a good idea?

 

[vwman111]

Bumping this thread up as it is becoming more common for us to have ITM LEAPS after the recent rally. I have 2 questions for discussion and comment:
1. How deep do you let the option get ITM?
2. What do you use as the the trigger to role (specific greeks? time to expiry? etc...)

 

[paydirt76]

Bumping this thread up as it is becoming more common for us to have ITM LEAPS after the recent rally. I have 2 questions for discussion and comment:
1. How deep do you let the option get ITM?
2. What do you use as the the trigger to role (specific greeks? time to expiry? etc...)

I'll tell you about a friend of mine who 60x a 60k Roth... Depending on your position size relative to your overall net worth and how willing you are to lose on a position... And given that from time to time Tesla will be flat or down over a two year period (and upside calls evaporate/wither)...

2. It can be hard to stick to certain rules, but it's always good to have a plan going in.
IF YOU WANT TO MANAGE RISK
My friend has waffled from rules to stick to a certain number of deltas (their goal is to be long 5,000 deltas for the next 5,000+ points LOL) and then set ranges for when to add deltas when they reach a certain point (& when to trim when they hit the upper range). So it could be "Home base is 5,000 deltas, buy 1,000 deltas when deltas drop to 4,000, sell 1,000 deltas when deltas go up to 6,000". This causes one to generally "positively scalp" the options. It also generally causes a ratcheting of gains on the way up.

The same is true if you created a % of investments rule. Home base is whatever you would be comfortable with losing, but including a percent you would invest if % of your total dropped. So maybe total you are willing to lose is 30% of your current % of all investments. "20% is home, buy back to 20% when it hits 10%. sell back to 20% when it hits 30%."

1. There's a certain $$ magic in buying OTM leaps and letting them get to / blow through your strike.
IF YOU ARE YOLO'ING (trying to build up a small account)
Let's say stock was 700, and you bought the 900 calls. One might roll up (and out) before it hits 1100. The symmetry.

 

[vwman111]

Thank you @paydirt76 that is helpful. Using your friend as an example, one could have a target of 5000 delta's but that could be achieved in different ways depending on risk (way OTM leaps vs deep ITM short term options).

It will be interesting to monitor my deltas as the stock price changes without buying/selling any options. That is definitely a new way for me to think about my options. Currently i am simply closing my eyes, crossing my fingers and hoping we have a huge run up over the next 2 years.

 

[paydirt76]

Thank you @paydirt76 that is helpful. Using your friend as an example, one could have a target of 5000 delta's but that could be achieved in different ways depending on risk (way OTM leaps vs deep ITM short term options).

It will be interesting to monitor my deltas as the stock price changes without buying/selling any options. That is definitely a new way for me to think about my options. Currently i am simply closing my eyes, crossing my fingers and hoping we have a huge run up over the next 2 years.

Yes with a delta goal/target, you can do that however you want but you also need to have an understanding for how deltas change over time/price. For example, we know your upside is capped if you sell put. The temptation at the bottom is to sell put, but you're better off buying call because upside isn't capped and your delta grows as the stock goes up. When you sell put, your positive delta goes down as stock goes up.

You can estimate roughly how your delta changes by looking at gamma, but gamma varies too. Gamma strongest when with at the money or the options with most time value. But if you gamma is say 5 (If gamma is quoted as 0.0005 for one option then you may need to multiply by 100 for Tesla right now), then if stock goes up 100 points, your deltas would be roughly 500 higher at the end of that run. Gamma is weakest for LEAPS, but leaps are more forgiving all else equal.

You can get your goals however you want and they can change over time. There are probably more ways, but primarily (a) deltas, (b) % of investments, or (c) YOLO to build shares.

5,000 deltas can be intense. A recent 4 day span caused the following value changes... +500k, -250k, -250k, +300k. Some profits have been taken out (and time to time reinvested) and the whole position is profits. They made a very recent gamble and have mentioned in the Super Bulls thread.

 

[CHGolferJim]

We are now in an SP downturn from AH of early Nov21 and early Jan22, (~30%), and IV is down after last night's ER. I'm thinking this is a time to do something clever with my LEAPs under the "rule" that delta increases with lower prices, and I have confidence in an uptrend from now to Jan 2024.

I'm allocated to approximately 50/50 Shares and Jan24 LEAPs 1000/1200/1400 -- latter having declined ~50% from early Nov21 (> than shares). Does it make sense for long-term returns under the uptrend assumption to roll these LEAPs forward and down in strike?

I can roll for small credits to Jun 23 800/950/1100. My general plan is to consistently roll LEAPs to maintain an allocation approximately equal to shares allocation, so this idea would be a swing trade of some kind, right? Thanks for any suggestions to consider by more seasoned LEAP investors.

 

[CHGolferJim]

We are now in an SP downturn from AH of early Nov21 and early Jan22, (~30%), and IV is down after last night's ER. I'm thinking this is a time to do something clever with my LEAPs under the "rule" that delta increases with lower prices, and I have confidence in an uptrend from now to Jan 2024.

I'm allocated to approximately 50/50 Shares and Jan24 LEAPs 1000/1200/1400 -- latter having declined ~50% from early Nov21 (> than shares). Does it make sense for long-term returns under the uptrend assumption to roll these LEAPs forward and down in strike?

I can roll for small credits to Jun 23 800/950/1100. My general plan is to consistently roll LEAPs to maintain an allocation approximately equal to shares allocation, so this idea would be a swing trade of some kind, right? Thanks for any suggestions to consider by more seasoned LEAP investors.

No comments?

 

[ReddyLeaf]

No comments?

I’m sure there are many folks with these same thoughts. I can’t help you much because my foray into LEAPS has been a disaster. I’ve always mistimed: buying high, selling low whether they have been OTM or ITM. My current 9/16 +c500s are down significantly from when I bought them and I’ll probably take the full loss on time value (maybe 20%) and eventually convert into CSPs. However, I might try timing selling them on a Monday AM peak, and then buy the next month’s version at the same price during a MMD. That’s all I can think of, though I’ll get shafted on both sides of the trade by the bid/ask spread. I’m lousy at timing trades.

 

[CHGolferJim]

I’m sure there are many folks with these same thoughts. I can’t help you much because my foray into LEAPS has been a disaster. I’ve always mistimed: buying high, selling low whether they have been OTM or ITM. My current 9/16 +c500s are down significantly from when I bought them and I’ll probably take the full loss on time value (maybe 20%) and eventually convert into CSPs. However, I might try timing selling them on a Monday AM peak, and then buy the next month’s version at the same price during a MMD. That’s all I can think of, though I’ll get shafted on both sides of the trade by the bid/ask spread. I’m lousy at timing trades.

Thanks. You can use limit orders for your selling and buying prices to avoid the bid/ask issue, although that may add timing risk. I have the rough impression that I've lost as often as won doing that rather than using market orders.

I've gathered data in the past 3 weeks on my LEAPs vs. possible roll positions that proves the less OTM LEAPs are more responsive to SP changes up and down. Since I'm holding LEAPs for profit on the position rather than to gain shares, I may leave the $1000 and roll the others down to increase delta, expecting to have to reduce the number of contracts, but I don't care about that since I'm looking for total value appreciation.

 

[30seconds]

I’ve looked to get ITM leaps that are 18+ months out once the stock has pulled back by at least 25%. I aim to sell once they are in profitable long term cap gains position and not hold to expiration.

Usually works and due to volitility of Tesla O have ended up with series of leaps with different maturities.

 

[CHGolferJim]

What happens to LEAPs that aren't divisible by 3, e.g., $1000, when the split occurs? Is there any value in choosing a roll to something like $900 or $750 prior to the split?

 

[ReddyLeaf]

What happens to LEAPs that aren't divisible by 3, e.g., $1000, when the split occurs? Is there any value in choosing a roll to something like $900 or $750 prior to the split?

I think they just all divide by 3. For non-integer values, they may round a bit, but not significant. Unfortunately, some of those weird ones won’t be heavily traded, so may have a larger bid-ask spread. I plan to get into options divisible by three asap. FYI, my c500s are now worth more than I paid, so I may roll up to 600s.

 

[CHGolferJim]

I think they just all divide by 3. For non-integer values, they may round a bit, but not significant. Unfortunately, some of those weird ones won’t be heavily traded, so may have a larger bid-ask spread. I plan to get into options divisible by three asap. FYI, my c500s are now worth more than I paid, so I may roll up to 600s.

I was too eager to shift half of shares into LEAPs and take some money off the table, and did that at $1222, so my $1000/$1200/$1400 LEAPs are >50% down. Interestingly, in the past two weeks, the values of what I have and the roll candidates have appreciated almost the same %, except the $1400 are noticeably higher, having been hammered the most.

 

[Papafox]

@woodisgood said:

Well I wouldn’t have thought my Jan ‘23 ITM LEAPs would be in danger but here we are.

I'm in a similar situation but resolving it through no/low cost rolling on strong up or down trends during a day. First I had a sugarload of Sept 22 DITM leaps but I moved them all to Jan23 DITM leaps (most at same strikes) for very little. Now it's time to first move them to Mar23 and then to Jun23 while we wait to see a market recovery. I'll eventually will move them to Jan2030s if I have to wait for an excellent return. I can outlast the market's irrationality.


Timing leap rolling works best in an IRA or other tax-protected environment. If you are trading in a regular brokerage account, you might still benefit from doing so if the call price is approaching the price you paid for the call. There's little tax to pay if you sell your Jan23 leap for a little more than you paid. If it's worth less than you paid, you get into a wash-rule situation where you can't deduct the loss. Thus, selling the Jan23 for slightly more than you bought it is the sweet spot if you're not trading in an IRA/401K. In a brokerage account, consider long-term vs. short-term gains.

Let's say the stock price is going up (I know, a rather rare event these days). You first buy the later expiration leap (such as mar23 or jun23) and then you wait for TSLA to rise enough to sell your jan23 leap close in value to the newly purchased, later expiring leap. Voila, a no cost/low cost leap roll. Let's say your Jan22 leap has $180 value but a Mar23 leap of same strike is selling for $185. You need somewhat more than $5 stock price rise to bring about a zero-cost pseudo-roll. If the stock price is descending quickly, you first sell the Jan23 leap then wait to buy the later-expiring leap when it reaches approx. price parity with what you received for selling your Jan23.

Sometimes a strong run upwards or downwards runs out of steam and starts to reverse before you've reached your no-cost goal. In this case, it's essential that you have spare cash in the account to make up the difference. Also, it's important that your brokerage account has a margin component that allows you to use the funds from a just-sold transaction to immediately buy another transaction. Another alternative is to sell a $26.67 Jan23 call and buy a Jun23 $50 leap, provided you're not paying too much for change in time value. The new leap is worth less than the old, but you generate cash in the transaction, and if the cash increase is roughly the same as the decrease in leap value because of higher strike price, you have done a neutral trade. I did this exact trade on Thursday Oct13 and and it doesn't require much of a TSLA price change to be profitable.

You need to get comfortable with the process if you're going to move lots of calls and I strongly suggest trading only 1 call at a time until you have it wired. I try to keep the value of the purchasing and selling calls within about $5 of each other so that I don't need a huge rally or plunge to do the trade without overnight exposure. Overnight exposure in this environment can be dangerous. Nonetheless, I was trading 5 Jan23 166.67s for 5 Mar23 166.67s and was playing the downtrend by selling first and buying later. I took a chance by not completing the trade before market close, figuring there would be a least a few more dollars of drop before TSLA hits rock bottom (I was right) and completed the trade as TSLA bottomed out Thursday morning.

Use the volatility to your advantage.