How Does it All Work?

Good question?

For starters, let’s think about selling LEAP options.

The emphasis here will be on selecting stocks that have good and presumably safe dividends.

Ideally, a collection of such stocks would also be diversified, so that you would be looking at a collection of blue chip stocks in various sectors that happen to already reward investors with a return of capital.

That’s not so difficult, but it isn’t necessarily easy to get the timing down right.

For that reason, it may often be prudent to make a share purchase in stages. That could mean getting an average price lower or higher than the initial entry price.

If buying in “aliquots” or portions at a time, let’s say over a 4 week period, the initial option sales may actually be for relatively short terms, perhaps even for a week, initially developing a Leapfrogging pattern of income flow.

The next stage is converting those shorter term options to LEAPS.

That generally is done when a portion of your holdings are likely to get assigned as their expiration approaches. They, and even perhaps their cohorts expiring in subsequent weeks get rolled over to longer dated LEAPS.

With a 6 month expiration, I like to look at a strike price that is at least 10% above the shorter term strike price.

When approaching a 12 month option, I want a full 20% higher strike price.

Simple.

Add to that dividends and the add to that the option premiums and you are looking at a good return if the shares behave themselves.

As an example, if you receive Trading Alerts via text message or email, you would get something like this, on say July 9, 2018:

Buy Microsoft (MSFT) $99.05.  STO 7/13/18 $100 for $0.94

For those who were not subscribers to Option to Profit or have not read the book, “STO” is short for “Sell to Open.”

That is an order to your brokerage to sell call contracts to open a position. A short call position. By doing that, you just gave someone the right to buy those shares from you for $100, but that have to do it no later than the close of trading on Friday, July 13th.

In return you got $0.94 for each share, less commissions and potentially subject to short term capital gains if not in a tax deferred account.

For those with Web Access Subscriptions, this is what it will look like on the “Most Recent Trades” page.

During the course of that week there may be reason to see those shares assigned, rollover the option or even add additional shares, especially if the price heads lower.

That is the beginning of the stepladder creation necessary for Leapfrogging.

For example, if it looks as if the options will go unassigned, you might receive the following alert:

Buy Microsoft (MSFT) $98.05.  STO 7/20/18 $99 for $0.88

Then, we would look for the very first opportunity to sell calls on the first aliquot, but this time looking at a later expiration date, such as

STO Microsoft (MSFT) 7/13/18 $100 for $0.90

Or, if we had wanted to roll the option contract over, either to prevent assignment or just to capture more option premium, the Trade Alert would have 2 components:

BTC Microsoft (MSFT) 7/13/18 $100 for $0.12

STO Microsoft (MSFT) 7/20/18 $100 for $0.68

In this case, “BTC” means “Buy to Close,” because you have to first close out your existing short position before you can sell new options on it.

That would look like this:

Subsequently, there may be reason to add more shares or to rollover the 7/20 aliquot to 8/3, or to actually start thinking about January 2019, in which case a $110 strike would fetch about $2.50 in option premiums.

In the meantime, there are dividends in August, November and possibly even January.

It adds up. It all adds up.