Discussion in 'ETFs' started by Peter1a, Oct 28, 2011.

  1. Peter1a



    I am a long term investor .I own SPY etf that I am planning to keep for 25years or more.I was wondering if it would be a good idea to convert part or all of my SPY into deep ITM LEAP. It looks that if you buy dec 13 with 60 strike price,there is almost no time premium. This way I could own double the amount of my current holdings and have the same risk and reward, as the LEAP should move up or down dollar for dollar. What am I missing here?

    Thank you for your help.
  2. ASE1245


    If you own the SPY, you get dividends. If you own the call, you don't. I would keep it simple. If your plan is to be long, stay with the SPY. If you'd like to hedge it, consider selling OTM calls that are long dated, above what you believe the market will move up over that time.
  3. SteveH


    Tax note for a retail account:

    If you sell covered calls against shares owned for less than a year, then you are suspending the capability to collect long-term capital gains on those shares, no matter how long you may own them going forward.

    In other words, you can't hedge stocks/etfs with covered calls until after the first year if you want to claim long-term gains on those shares.
  4. Peter1a


    I've forgotten to mention that I am taxed at 22% tax rate on all investments regardless of type or length as I am not a US resident.
  5. As long as your selling CCs

    But if you stop selling CCs and wait a year then you can claim the LT status.

    CCs are treated similar to buying a put on your long position.
  6. kivd


    You are only missing the dividends.

    Actually, you have less risk in ITM Call position, because if SPY takes a hard hit your ITM Calls will begin to show time value, plus that time value will have huge IV because of the inverse correlation between the VIX and SPY (Your calls would still be very expensive). So if you forget about the dividends for a second, you have double the return on less risk. Except I have absolutely no idea what type of dividend you earn on SPY so it may not be worth it.

    Something else you have to consider is the fact that once the expiration of these ITM Call leaps arrive, the bid price (where you can sell) will be way underpriced and not worth it for you to sell at, so what you'll have to do is exercise your calls (rather then sell them) and sell you SPY into the market. But since you said you have double reward, you'll have double the shares to call for. So you have to have a margin account to hold a margin position for just a few minutes (the time in between when you call for your shares until you sell them).

    Hope that helps
  7. How will your risk/reward be the same if you buy double the amount of your current holdings? Each LEAP will be a proxy for 100 shares and will move in step with SPY, so if you buy 2 LEAPS for each 100 shares you currently own, you will be leveraged 2:1 and your risk/reward will move accordingly.
  8. kivd


    I think he means having the same risk.
  9. ===========
    Frankly i still like some derivatives, depending ;
    if the trend is real strong, high probability trend [mortgage on a strong trending REAL ESTATE market....SPY.....], but i dont see RE or SPY as strong trending now. I study trends a lot.

    It is true , with an option, its easy to figure risk exactly;
    cant do that with long SPY. If you do buy options;
    keep careful records of derivative P&L, cash P&L.........................
  10. MTE


    Unfortunately, you don't have the same risk simply because if SPY is at 60 at expiration then the shares are still worth 60, while the leaps would be worthless. If you use leaps to double your holdings then you leverage yourself 2:1.
    #10     Nov 10, 2011