Author Topic: Long term investing with option  (Read 351 times)

helloyou

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Long term investing with option
« on: July 08, 2021, 07:09:31 AM »
Hello

Is it possible to do long term investing with option? For example buy an ETF with 2 years expiry date and as deep in the money as possible so that it doesn't expire worthless (eg. Buy VOO call option with 2 years to expiry with strike price of $150)

At expiry, assuming VOO stays at current price ($390), the buy back or roll over would cost about 5% of capital invested.

So the benefit of this is to only use 60% of capital at a cost of 5% interest/year.

Anyone does this? The main concern seems to have to realise the gain/loss every 2 years when rolling over the option

specialkayme

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Re: Long term investing with option
« Reply #1 on: July 08, 2021, 08:49:42 AM »
Yes it's possible, and yes many do it.

One downside, as you mentioned, is increased taxes. If you hold a LEAP option longer than 1 year you can get cap gains rate on it. But the buy and hold counterpart pays nothing in taxes. So there's that. Another downside is you'll miss out on dividends. Not a big deal, but they do add up over time. Lastly, you expose yourself to sequential risk significantly more. If you just happened to buy VOO at the peak of the market, you could hold onto it for DECADES in the hopes it comes back, but if you bought a LEAP VOO call in the peak of the market, you need to hope it comes back before the option expires or you'll have to realize a loss. Assuming you're just planning on rolling indefinitely, and the option doesn't expire worthless, you still should be OK in the long run though.

vand

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Re: Long term investing with option
« Reply #2 on: July 08, 2021, 10:22:11 AM »
no free lunches in options, but you aren't the first to ever have this idea
https://forum.mrmoneymustache.com/investor-alley/vix-is-down-maybe-time-for-'calls-and-cash'/

MustacheAndaHalf

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Re: Long term investing with option
« Reply #3 on: July 08, 2021, 07:35:52 PM »
Is it possible to do long term investing with option? For example buy an ETF with 2 years expiry date and as deep in the money as possible so that it doesn't expire worthless (eg. Buy VOO call option with 2 years to expiry with strike price of $150)

At expiry, assuming VOO stays at current price ($390), the buy back or roll over would cost about 5% of capital invested.

So the benefit of this is to only use 60% of capital at a cost of 5% interest/year.
Look at Yahoo Finance data on VOO versus SPY: VOO has 6m shares of daily volume, while SPY has 98m daily volume.  When buying options, you should go with iShares S&P 500 (SPY) calls.  You can also visit the options page for both, and you'll see the limited expiration dates for VOO options (6) versus SPY options (34).  For example, SPY has options that expire mid-week - I've never seen that anywhere else.

I like 2x calls, since they tend to have 2x upside / 2x downside (unlike riskier calls).  If you instead go 5x ($370 strike Dec 2023), you get wiped out after a 14% drop (7x losses).  Heavy leverage leads to heavy losses in a downturn.  One way to control that risk is limiting how much of your portfolio is invested in call options / leverage.

helloyou

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Re: Long term investing with option
« Reply #4 on: July 09, 2021, 02:50:04 AM »
Tax is a main problem. Dividend is too but I suppose leverage allow to give them up... it'd also make the option cheaper as I'd assume it's priced in

@vand thanks for the link it's very informative. The thread highlighted some con, especially about using put. It's something to consider but I wasn't planning to use put or keep large amount of cash aside. Just to use option as an alternative to buying long.

@MustacheAndaHalf That's a very interesting point I didn't consider. Because I want my portfolio to be robust and ideally be able to stay alive even if the market drop by 50-70%.

With 2x call option, I can only use about 60% cash but then my portfolio get wiped out should the market drop by 50-60%. I suppose for higher leveraged portfolio it really needs some protective puts (long term) to avoid such scenario

MustacheAndaHalf

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Re: Long term investing with option
« Reply #5 on: July 10, 2021, 05:29:48 AM »
@MustacheAndaHalf That's a very interesting point I didn't consider. Because I want my portfolio to be robust and ideally be able to stay alive even if the market drop by 50-70%.

With 2x call option, I can only use about 60% cash but then my portfolio get wiped out should the market drop by 50-60%. I suppose for higher leveraged portfolio it really needs some protective puts (long term) to avoid such scenario
The lowest strike price I see is $185 / $435 for SPY, which means a 70% drop wipes out every call option.  You can't avoid that purely with calls - you need a mix of investing normally in ETFs/funds and buying calls.

You keep mentioning paying 60% for 2x calls, which doesn't make sense to me.  Calls with 2x leverage are 50% the price of the ETF, by definition.  If you invest 60%, you have 1.67x leverage, not 2x.

Right now SPY $200 strike calls cost $238 or less for Dec 2023 expiration.  So that price is $438 / $435 = 100.5% of the stock price.  For 2x leverage on the S&P 500, you can pay 0.5% for 2.5 years worth.  If you wanted to be more precise, you could buy $220 calls for $218, which is about the same situation.

helloyou

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Re: Long term investing with option
« Reply #6 on: July 10, 2021, 10:27:46 AM »
Yes probably a true 2x wouldn't be appropriate on the whole portfolio. A smaller 1.6x leverage would be safer.

I was looking at buying put but they are expensive. I wonder if there is a way to do it safely?