Leapfrogging

I know, I know.

LEAPtoProfit is supposed to be about longer term commitment to stocks and less trading, all while trying to boost returns through an increased flow of income from the sale of LEAPS.

But that would be boring, especially if you had spent more than 10 years incessantly trading and reveling in the introduction of the weekly option so that you could trade even more frequently.

Leapfrogging doesn’t involve the use of LEAPS, it involves rolling over existing short option positions or selling new ones on a portion of your holdings in a particular position and selecting an expiration date that “leaps” over existing short position dates in that same security.

Essentially, what this strategy does is to seek to ride out price fluctuations in existing positions and selling options even when those positions are deeply out of the money.

Stocks usually go up and then down, then up again and then down again.

There are certainly stocks that have sustained moves up or down and go on to create new normals for themselves, but most trade in a fairly reliable range, with gradual creeping higher or lower of their longer term price ranges.

So armed with the knowledge that there is a reasonable probability of consistent fluctuation,  a deep out of the money position that is in danger of getting assigned could be rolled over to a date beyond the expiration date of the last in your series for that stock.

That buys you time for the market to correct the price of those shares and then to start the process all over again.

As an option seller, time is a tangibly valuable friend.

One of my recent favorites has been General Electric.

When was the last time anyone used the words “favorite” and General Electric in the same sentence?

I happen to have 4 lots of General Electric ranging in price from about $14 to $22.

I had been most recently selling $14.50 calls, but when it looked as if one of those lots was going to be called away, I rolled it over to a date 4 weeks into the future.

That did three things.

  • It prevented assignment;
  • It generated income; and
  • It gave the position a chance to ride out the price increase to live another day as an income generating position

To “leapfrog” you need a lot of shares in a given position.

I generally like to think of leapfrogging with 3 to 4 expiration dates in mind.

That would mean that you would need 300 or 400 shares of a given position. but realistically, more like 2000 to 4000 shares, so that each short option position could be 5 to 10 contracts.

Using weekly options, that does mean that you have to devote a bit of time to the positions, but as I look at how my portfolio has evolved into the use of longer dated options, I have fewer positions that I have to keep an eye out for with each weekly expiration.

In other words, I have the time for an occasional dalliance.

Now, the more experience you have had rolling over short option positions, the more you think about how much nicer it would have been not to have to have paid to buy back your short options to close out the existing positions.

I used to, and still do, think of that as being one of the costs of doing business, especially if you wanted to assure that you would be able to capture additional option premium.

I used to hate seeing a position expire on a Friday, having the intention of selling new options on Monday, only to see the price of shares decline on Monday’s open, taking with it the appeal of selling a new weekly option.

For that reason, sometimes I keep one lot uncovered and typically look to sell options on that lot on the Thursday or Friday of the week for an expiration date determined by my last expiring short position.

That way, if it looks like the lot set to expire that week will not be called away, but is still close to the strike price, I sell calls on the uncovered lot leapfrogging over the existing positions.

That precludes the costs of buying back the short position set to expire, but in the event that position suddenly goes into the money, than I just go ahead and rollover that position, leapfrogging even the previously uncovered position.

This is actually a lot of fun.

As long as your position stays near the strike price, for a position like GE, that could mean a 1% return every week.

Of course, that’s a big “if.”

Right now, GE is at about $13.50 and only 2 of my lots are covered because I want to wait for a hoped for price spike, as occurred just the previous week and which gave me the opportunity to open another short option position.

The price spike isn’t on the order of dollars. The price spike is more like $0.50. Granted, that is about 7% at current levels, but all you want is enough to get your shares back in the game of generating additional revenue.

I look at shares like this as an annuity, but without the outrageous costs.

Who knows, maybe even Ken Fischer would be proud.