Of course you'd have to buy the stock on margin to get ~100% because the premium from selling the LEAP is not = to the stock price, it's obviously less. In reality, I don't think it's a bad strategy.
Good point on the margin. MSFT is around 47.6 today, the jan '05 50 calls are around 10.7. Higher volatility underlying could hit that 100% return level on margin.
The problem, IMHO, is knowing when to cut your losses on a trade like this. The delta of the LEAP will be around 60, so this trade will lose money faster on the stock when it goes down than you make on the value of the LEAP premium declining. Coupled with the fact that the stock was most likely bought on margin and this trade can lose money fast. Now you can hold it for a long time, but theta decay on a LEAP is REALLY slow. So in fact you have to be right (i.e. stock unchanged or higher) pretty close to expiration or have one incredible rally to get a 100% return.
I haven't put the pencil to it but I don't think covered call with leaps will do it. I'd be more inclined to look at long stock on margin and a short LEAP straddle. As long as the market remained neutral you might make it. He said two TRADES not necessarily two LEGS to the position.
Good point. A short leap straddle would get you a higher return if you're right. Of course it would also excelerate your loses if you're wrong. Because both the value of the LEAP put you sold has increased (which you have to cover) & the stock value has decreased (which you own).
I thought of this also but in the description there is no risk to the upside. Being long stock and short a straddle would add risk to the stock going up. The numbers might not add up (embellishing?) but I think the covered call is the key.
Elitethink; I may be missing something but I don't see how the stock moving up is any more risk in the short straddle than it is in the covered call that takes in half the premium of the straddle. One leg of the straddle is a covered call.
You're right, I was thinking of a ratio write where two calls are sold. A thousand apologies. I think the straddle idea is quite viable.