After more than a decade of getting a serious level of excitement by simply making a trade, even if the net profit per share was a penny or two, I always knew that someday I wouldn’t be able to sustain the kind of maintenance that it took to keep on an eye on a portfolio.
Even worse, I knew that someday I wouldn’t have the kind of time and attention that it took to keep an eye on multiple portfolios, especially when those portfolios may have had different goals and tolerances for risk.
Like most people, I always looked at investing and investment philosophy as being on a continuum.
The difference is that while most conventional wisdom believed that the continuum started with mutual funds or their modern-day equivalent, the ETF, and then ended with the safety of fixed income instruments, I never wanted any part of mutual funds, nor bonds.
For older people, like me, bonds were obligatory, but I never could figure them out. I just didn’t understand them and got a headache even thinking about the inverse world that bond traders inhabited.
While it’s not entirely lost upon me that call sellers and put sellers may live in an inverse universe, as well, those seem much easier to understand and negotiate.
Anyway, my children are at the early stage of this continuum. They can take lots of risk.
One of those kids has a portfolio that aggressively uses covered options, just as I had done for a long time and he is doing very, very well.
The other is riding the market’s wave and is doing very, very well, too.
Both are involved with individual stocks and have by-passed Index Funds and ETFs, altogether.
In the case of the former, I am calling the shots and making the trades, but the portfolio has only a handful of positions and while I’m making the trades, there aren’t that many to be made and he is learning the ropes.
I, on the other hand, am ready to transition from a large portfolio of many individual stocks with short-term short option positions as hedges to far fewer positions with longer term option hedges and ultimately to Index Funds.
Maybe that means I can spend more time with, as yet, unrealized grandchildren.
I suspect that the latter part of that transition is at least 5 years away, but the first part of that transition began a few months ago and will be my primary activity over the course of the coming year as this new venture, LEAPtoProfit.com takes off.
You can be certain that when it does finally take off there will be subscriptions to be sold, as well (maybe a new book, too.)
But now, a little background:
LEAPS are “Long Term Equity Anticipation Securities.”
That’s just a fancy way of saying they are longer term dated options. I’ve extolled their virtues on Seeking Alpha before.
As opposed to the weekly options that I had favored for so long, you don’t trade them very often.
What they are good for is the phase of life that I am in right now.
That is a phase of life when I want to secure my assets, but still want to derive income from them.
Social Security income is fine, but it’s nice to have something else.
Dividends are OK, but, then too, it’s nice to have something else.
Option premiums are pleasing, but it’s still even nicer to have something else.
Capital gains on shares are the icing on the cake.
Well, actually subscription payments are the real icing on the cake, but let’s not dwell on that.
And all are possible with even less trading and no longer needing to be glued to the screen, especially as Friday afternoon winds down.
Pragmatically, there are some other benefits to selling LEAPS than not having to be chained to the monitor.
If you like to assemble a portfolio of dividend paying stocks, you can very nicely supplement that income stream from dividends. More importantly, even if your position is deep in the money and an ex-dividend date is coming up, but lots of time still remains on the contract, you are still likely to get your dividend.
That recently was the case with a very deep in the money position in “The Gap (GPS).”
With a $25 Jan 2019 contract and shares trading at about $33, I still received the $0.23 dividend and expect to receive at least 3 more, as I further expect that by January 2019, The Gap will close that price gap and move closer to $25, giving me a chance for a rollover and creating an 8% annuity, or more.
As an aside, before you wince about that differential between the strike price and the current price, in 2017, I generated $5.05/share in option premiums on The Gap $0.92/share in dividends while I await January 2019.
The other nice thing is that if you are bullish on a stock it generally is not a good idea to sell calls, but with LEAPS you can have it all.
I just did that with British Petroleum (BP), by selling another January 2019 call position.
In that case, however, when shares were going for about $43, I sold a $50 call.
That means that while awaiting that expiration there will be another 4 dividends, or about $2.40 in dividends, $7 in share appreciation (if called) and an additional $0.64 in premiums.
When selling LEAPS, I generally look for a strike price that is at least 10% above the current share price for a full year of time.
In this case, I went for nearly 20%.
That seems like a fair gain on shares for a year, right?
Add to that about 6% in dividends and another 1.5% in option premiums and soon you’re talking real money.
To play the LEAPS game, an individual investor has to decide for themselves what level of share appreciation for a year would leave them satisfied. Is it 7%? 10%? 20%?
Whatever that level is, it should be realistic and not leave the option seller subject to self-flagellation for missing out on gains that might have occurred if there was a runaway rally.
But what if those shares head lower?
The essence of using LEAPS is the presumption that you are, or have become a “buy and hold” kind of trader.
In my case, it’s almost like “ashes to ashes and dust to dust.”
I started as a buy and hold investor and am getting ready to return to that philosophy.
But now, the portfolio is going to be weighted with Blue Chips and S&P 500 names that also happen to pay good and safe dividends.
The dividends are key. The safety part is pretty important, too.
At this stage in life I don’t want to worry and that includes worrying about a portfolio that isn’t keeping up.
The expectation is that even in a falling market a portfolio of blue chips will do no worse than the S&P 500 and the option income will cushion the fall as awaiting the bounce back.
The only challenge, at this stage of life is staying alive long enough for the bounce back.
But even if you don’t, your heirs will thank you.