It’s Mailbag Friday!
It’s also the day after Thanksgiving. The stock market is only open for half the day. You’ll have a few extra hours this afternoon to go shopping at your favorite brick-and-mortar retailer.
So, while you contemplate what to do in the short term, we’ll focus today’s mailbag on the longer term.
Here are a couple of questions about long-term options, aka LEAPs…
You have been talking about the Volatility Index (VIX) being at an all-time low, and how that historically leads to a correction in the overall market.
Here is my question: Would you recommend buying long term options going out as far as 2020 right now or waiting until the correction actually takes place? I am especially interested in the mining shares which have not appreciated to any great extent in this great rally, and which historically go up when the overall market goes down. Most of them are down anywhere from 10-20% (and some even more) from their high for the year.
–James B.
Thanks for the question, James.
At first glance, it might seem reasonable that if you have a long-term opinion on a stock or a sector that you could just buy a long term option based on that opinion and then just wait to be proven correct.
For example, if you believe – as I do – that gold stocks will be much higher in a couple of years, then you could simply buy long-term call options on your favorite gold names and then wait as the market eventually recognizes your brilliance.
In theory… that makes sense. In practice, though, it doesn’t work.
Options are wasting assets. They decay in value over time. The more time you buy, the more decay you suffer from. You will do far better over time as a seller of options than as a buyer.
Buying options as a speculative trade can work well if you’re confident in a short-term move. But buying long-term options based on long-term expectations is usually a low-probability trade.
If you’re bullish on mining stocks over the next couple of years, I suspect you’ll be far more profitable as a seller of uncovered long-term put options on mining shares than as a buyer of long-term calls.
The only strategy I suggest that involves buying long-term call options is when you sell short-term covered calls against your long-term call position.
I found your write-up on selling covered calls on LEAPs very interesting. Thank you for that information.
My questions are: Do you have preferred deltas for the in-the-money LEAPs? Also, how far out should you go to purchase the LEAP? Are there preferred deltas and times?
Thanks again!
–Barry C.
Hi Barry, thanks for writing in.
The term “delta” refers to how much the option changes for each $1 move in the underlying stock. Since a LEAP covered-call strategy uses LEAPs as a substitute for the stock, I prefer to use a LEAP with deltas closer to 1.00 – meaning the option moves right in line with the stock. So, I’ll buy a couple of strike prices in-the-money.
As far as the expiration date of the LEAP is concerned… The longer the time to expiration, the lower the delta. So, I’ll typically go out just until the next year. For example, if I was using this strategy right now, I’d be looking at the January 2019 LEAPs.
Best regards and good trading,
Jeff Clark
P.S. One of my favorite ways to ensure my subscribers’ success is to communicate with them, just like I did today, about their trading questions. Simply, if they’re more informed about my trading strategy, then my guidance works better for them.
This communication is one of the reasons I’m able to hand them winners like 185% in 1 day on Paypal… 200% in 29 days on Ford… and 343% in 11 days on Martha Stewart Living – week after week.
To learn more about the Delta Report and how my strategies can work for you, click here.
Reader Mailbag
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