L.e.a.p.s. - Trading-Lab

Leth · #1 10-22-2007, 08:30 PM

just curious to know if anyone uses Long-term Equity AnticiPation Securities as thier tool for leverage?
id love to see everyones perspective on the subject; even if you don't use them.

charlesK · #2 10-24-2007, 12:43 PM

Hello leth,

even though I trade options, I have never traded LEAPS. Short term options can also be used for leverage. do you incorporate LEAPS in any particular strategy?

Leth · #3 10-24-2007, 02:18 PM

ive been using l.e.a.p.s. for quite awhile now as leverage in my trendfollowing systems. trading with short period time decay in options goes against my own psychological threshold and trading philosophy. for example, if the trend is continuing to go up at the time of my short term option experation, i may miss out on a further substantial gain (no one really knows when a trend is going to end) . my strategy/system, which incorporates the use of l.e.a.p.s., allows me to trade for absolute returns and keeps broker transaction costs to a minimum.

milo · #4 10-29-2007, 05:34 PM

so you are using LEAPS as surrogates for longer term stock trades. that makes sense. as a matter of fact, several times I found myself using near-expiry options and losing money even though I was right on the underlying direction.

Leth · #5 10-30-2007, 02:13 PM

i trade leaps options only. i hold trades anywhere from 2 weeks to about 9 months. i get out of an position when my system tells me. i use leaps that are roughly 1 year out from the day of order because i never know when the trend will end. i dont even know if a stock will trend at all. its all about playing the odds.

ProTrader · #6 11-02-2007, 02:16 PM

why do you prefer LEAPS to outright stock ownership? Is it just a matter of leverage? If you do mid to long term trading you could pocket dividends on stocks and increase your bottom line.

Leth · #7 11-02-2007, 02:29 PM

leverage only...

im not a big fan of dividends..i make more with options

TheBirdLives · #8 12-12-2007, 06:37 AM

I've used LEAPS primarily to amplify a long stock position when I believe the stock is in a dip. That often works well, but it sure didn't work for AMGN this year.

That just underlines the need to set stops for LEAPS just as you would for stocks.

Soverus Khan · #9 12-12-2007, 10:44 AM

Hello Bird.

TheBirdLives · #10 12-12-2007, 05:45 PM

Quote:

Originally Posted by Leth

leverage only...

im not a big fan of dividends..i make more with options

Quote:

Originally Posted by Soverus Khan

Hello Bird.

Hi Sov,

You mentioned you wanted more looks at how to play options.
Leth referred to leverage as a reason to play LEAPS.
Here's an example of what Leth is talking about using your old friend AAPL.

Look at the AAPL JAN09 LEAP with a strike of 190.
Assumptions:
Stock price: 190 (assuming an at the money - ATM - price isolates time value)
Volatility: 50% (close to todays figure)
Days to Expiry: 400 (from 12/14/2007)

Here is a table covering some of the possibilities:

Click on the image below to see a larger version.
AAPL LEAP Table.jpg

The option prices and deltas are calculated using the Black-Scholes model.
You can Google 'Black-Scholes Excel Add-in' to find a bunch of choices, including the Hoadley site that I am partial to.

I calculated leverage as
Lev = PPS/OptPrice * OptDelta
This is a quick and dirty calc, and doesn't take into account margin leverage that might be available on the stock.
Also, the whole table assumes a constant volatility figure. That is certainly not true, but does not, IMHO, materially affect what I am trying to show.

Note that both the put and the call lose value each month.
I'll leave it to you, Sov, to figure out what kind of movement in stock price you would need to break even on a LEAP 30 days later.

Also, I chose 400, 370, and 340 days — roughly 13, 12, and 11 months — to analyze because that seemed appropriate for a December post. The LEAP analysis morphs, over time, into a short-term option analysis.
I wonder, Leth, what range of time to expiry you like. In particular, when would you switch from JAN09 LEAPS to JASN10 LEAPS?

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#1 10-22-2007, 08:30 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	L.e.a.p.s. just curious to know if anyone uses Long-term Equity AnticiPation Securities as thier tool for leverage? id love to see everyones perspective on the subject; even if you don't use them. Last edited by Leth : 10-22-2007 at 08:42 PM.

#2 10-24-2007, 12:43 PM
charlesK Junior Member Join Date: Jun 2007 Posts: 26	Hello leth, even though I trade options, I have never traded LEAPS. Short term options can also be used for leverage. do you incorporate LEAPS in any particular strategy?

#3 10-24-2007, 02:18 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	ive been using l.e.a.p.s. for quite awhile now as leverage in my trendfollowing systems. trading with short period time decay in options goes against my own psychological threshold and trading philosophy. for example, if the trend is continuing to go up at the time of my short term option experation, i may miss out on a further substantial gain (no one really knows when a trend is going to end) . my strategy/system, which incorporates the use of l.e.a.p.s., allows me to trade for absolute returns and keeps broker transaction costs to a minimum. Last edited by Leth : 10-29-2007 at 06:01 PM.

#4 10-29-2007, 05:34 PM
milo Member Join Date: Jun 2007 Posts: 41	so you are using LEAPS as surrogates for longer term stock trades. that makes sense. as a matter of fact, several times I found myself using near-expiry options and losing money even though I was right on the underlying direction.

#5 10-30-2007, 02:13 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	i trade leaps options only. i hold trades anywhere from 2 weeks to about 9 months. i get out of an position when my system tells me. i use leaps that are roughly 1 year out from the day of order because i never know when the trend will end. i dont even know if a stock will trend at all. its all about playing the odds. __________________ Nothing is more difficult than the art of maneuvering for advantageous positions. - Sun-Tzu Trade with the trend, Ride winners, Cut losers, Keep bets small, Use Stops - Old School Last edited by Leth : 10-30-2007 at 02:19 PM.

#6 11-02-2007, 02:16 PM
ProTrader Senior Member Join Date: Jun 2007 Posts: 109	why do you prefer LEAPS to outright stock ownership? Is it just a matter of leverage? If you do mid to long term trading you could pocket dividends on stocks and increase your bottom line.

#7 11-02-2007, 02:29 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	leverage only... im not a big fan of dividends..i make more with options __________________ Nothing is more difficult than the art of maneuvering for advantageous positions. - Sun-Tzu Trade with the trend, Ride winners, Cut losers, Keep bets small, Use Stops - Old School Last edited by Leth : 11-02-2007 at 06:11 PM.

#8 12-12-2007, 06:37 AM
TheBirdLives Member Join Date: Dec 2007 Location: So Cal Posts: 36	I've used LEAPS primarily to amplify a long stock position when I believe the stock is in a dip. That often works well, but it sure didn't work for AMGN this year. That just underlines the need to set stops for LEAPS just as you would for stocks. __________________ The older I get, the better I was. -- John McEnroe

#9 12-12-2007, 10:44 AM
Soverus Khan Senior Member Join Date: Dec 2007 Posts: 306	Hello Bird.