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Discussion Starter #1
Hi,
Since I started seriously investing (6-7 yrs back), I always had this thought in my mind that whenever there is a recession, I'll buy SPY LEAPS. Now when the market actually fell, I also thought of buying TSX leaps for my RESP, but none of the ETFs have good enough liquidity, so slippage is too high. XIU.TO is the best but still not good enough.

So then, I thought lets go for a 5-7 LEAPS stock portfolio for my RESP. Advantages of thsi strategy are that I can get leverage upto 3X. Disadvantage is that liquidity is less than outright stock. Another disadvantage is that if the stocks fall by expiry, then I will have to rollover. But if I implement this strategy as ongoing, then rollover is not an issue because then it becomes one of the steps in the strategy. i.e rollover every year 2-3 months before expiry maybe. Another thing to consider is that what if the liquidity at the time of rollover is poor. In that case, I'll have to wait till assignment, sell the stocks and then rollover. But the chances of that are less.

Here are the tactics & steps -

1) I will select large cap stocks from TSX 60 with some industry diversification. The actual stocks dont matter so much for me, I'm anyways not good at stock selection. E.g I will select 1 bank, but not care much if its RY or BMO or TD.
Here is what I selected, but feel free to suggest otherwise
1 bank, CNR (CP didnt have good liquidity), ENB or TRP, SLF (or GWO or MFC), ATD.B, FTS, BCE

2) Then I'll look for Jan '21 option strikes where delta is around 0.8. Why 0.8 and not 0.9 or 0.7? No particular reason, you can higher or lower but I found that the option price was roughly 20-22% of the stock price. I'll also look at Implied Volatility (IV) of all the options and check if this particular option's IV is not particularly high.

3) I'll calculate the premium I'm paying. Premium = (strike price+option price) over the current stock price. Generally for this stocks, I'm paying premiums in the range of 2-4%.
So lets say TD is $60, and $45 option is selling for $16, then I'm only paying $1 or 1.67% over the stock price.

Based on 2 & 3 & PE ratio, I'll also change stocks in the same industry. Meaning if I'm paying less premium for BMO and more for TD, then I'll select BMO.

4) I'll distribute my cash so I'm buying almost equal amounts. But based on the premium/ leverage, I'll favour some stocks over other.

Based on all this, I calculated that I can get a portfolio thats worth $60K with only $12K (so 5X leverage). Since the delta is 0.8, if these stocks rise 10% by Jan '21, then my portfolio will return only 8% (without leverage) and 8*5 = 40% return. Likely, it'll be higher since delta rises as stocks rise.

If the stocks fall by 10%, then loss will 40% when I've to rollover. The actual loss will be lower because delta falls. In the worst case scenario if I cant rollover, I'll get the stocks assigned and then immediately sell them and go for another round of LEAPS.

The commissions will be higher in Questrade. Assignments will be bad as Questrade charges, but that will never be my objective, only a failover.

Thoughts/ comments?
 

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Checking some of your assumptions, as of Friday TD closed at 43.42. My option listings only go out to 16 Oct 20 (215 days). The 32.5 call has a delta of .80 and lists at 10.70 - 13.90. So let's say you can get it for 12.30. So far your assumptions seem realistic.

The drawback is the large losses if stock prices drop farther. If TD stock goes to 32.5 or lower your option expires worthless. And the time element. If you are young you may be able to afford this kind of gamble if you can lose your money and it won't cripple you financially.

You could make out very well indeed if you get the timing right.
 

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One of the best buying opportunities ever in the stock market was the crash low of 1987. The worst time ever to buy options was also @ the 1987 low since the extreme volatility caused extreme high option/leap prices.
 

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This is something I am considering. I would do a mix of stocks and options and look more at the Jan 2022 options rather than 2021 as I think you need more runway than that.

I would say something like 80-90% of purchases would be stocks, and then the balance would be the long term options. And the options might be split up with ones closer to ITM and ones that are way OTM. I would not plan on using the options for assignment.

I have 100K in cash in various accounts for this, and am in the process of getting a HELOC set up for another 100-150K availability. I think this is a once in a lifetime opportunity.
 

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Discussion Starter #5
One of the best buying opportunities ever in the stock market was the crash low of 1987. The worst time ever to buy options was also @ the 1987 low since the extreme volatility caused extreme high option/leap prices.
But the IV for the stocks I described are not out of the roof. Banks are in 20%s, some others are in 30%s. I dont know what the normal IV Is, but this is in no means high for individual stocks.
 

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Discussion Starter #6
This is something I am considering. I would do a mix of stocks and options and look more at the Jan 2022 options rather than 2021 as I think you need more runway than that.

I would say something like 80-90% of purchases would be stocks, and then the balance would be the long term options. And the options might be split up with ones closer to ITM and ones that are way OTM. I would not plan on using the options for assignment.

I have 100K in cash in various accounts for this, and am in the process of getting a HELOC set up for another 100-150K availability. I think this is a once in a lifetime opportunity.
For US, I'll mostly do SPY. Its the CAD portion that I dont have good options for ETFs.
 

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Discussion Starter #7
Checking some of your assumptions, as of Friday TD closed at 43.42. My option listings only go out to 16 Oct 20 (215 days). The 32.5 call has a delta of .80 and lists at 10.70 - 13.90. So let's say you can get it for 12.30. So far your assumptions seem realistic.

The drawback is the large losses if stock prices drop farther. If TD stock goes to 32.5 or lower your option expires worthless. And the time element. If you are young you may be able to afford this kind of gamble if you can lose your money and it won't cripple you financially.

You could make out very well indeed if you get the timing right.
Yes, the stocks falling from here is a risk, but that means they would have been down 60% or so from the peak. However, I would not let the options worthless. I might rolldown or rollover depending on when the fall triggers.

Its just that I have all the knowledge from the books, but no actual experience doing this.
 

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For someone who never traded options before you seem to have an excellent grasp of how they work. But like so many things in life you don't know for sure until you get the experience. If you can afford the risk go ahead but do it in a small way, don't go all in. No more than 10% of your capital might be a good limit. I would suggest even smaller except this is the kind of opportunity doesn't come along that often.
 

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So lets say TD is $60, and $45 option is selling for $16, then I'm only paying $1 or 1.67% over the stock price.

a problem right here is that there are no TD jan 2021 LEAPs options w strike price of 45. In TD, option series closer to the money go up by $2 increments, so there are TD jan21 44s & 46s, but no 45s.

but supposing a jan 45 did exist, if stk were $60 then a jan21 45 call would not be priced as low as $16. It might be bid as low as 16, but nobody would sell to that bid. The ask would have been north of 17.50.

suppose jan 45s did exist. Since this is the frozen canadian illiquid option market, a realistic buyer looking to purchase jan21 45 calls when stk is 60 & B/A could be 16.00-17.60, would be looking to pay 16.80-17.00. Maybe even 17.10-17.20.

consider what would have happened to price of those calls last week, when TD dropped intraday to just north of $51. At that point, an alarmed trader who had just paid $17 only two weeks previously to buy the option would have had a hard time selling it for more than $5.

extreme price volatility like the above is what makes the strategy undesirable for a registered account IMHO, particularly one held in trust for a vulnerable third party such as a minor child.

on the other hand, it's always possiible to find DITM LEAPs options selling at close to 100 delta prices (i'm from the cboe school so i call em 100 delta, but zero delta is also fine)

a standard strategy in non-registered accounts is to pair a long LEAPs DITM call or put with a short OTM call or put. Proceeds from the short sale offset/lower the cost of the long purchase.

one can do this as a diagonal calendar spread - ie sell the short OTM call with a closer expiration date, then keep re-selling a stream of OTM calls so as to lkeep lowering the cost of the long LEAP. Or one can do as a vertical spread, which is harder to predict.

diagonal call strategies such as the above do best in bull markets, perform badly in bear markets. Put strategies are the opposite.
 

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Discussion Starter #10
For someone who never traded options before you seem to have an excellent grasp of how they work. But like so many things in life you don't know for sure until you get the experience. If you can afford the risk go ahead but do it in a small way, don't go all in. No more than 10% of your capital might be a good limit. I would suggest even smaller except this is the kind of opportunity doesn't come along that often.
Thanks. I have the academic knowledge. I'd say RESP is only a portion of my portfolio, so it works well.
 

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Discussion Starter #11 (Edited)
@hp: you are spot on regarding the slippage (bid-ask). but i dont think of RESP as separate, its part of my overall investment pie. but points noted.

I did go in with LEAPS over last 2-3 days. so lets see how it goes.

XIU 17 Mar '21 @ 2.90
CIBC 46 Jan '21 @ 30
CNR 76 Jan '21 @ 28
TRP 44 Jan '21 @ 15 (I could have got this for much lower, but whatever. didnt know it'd drop)

I have order for ATD.B, would like strike 25 at 8 or so. I'm still in cash for much of my portfolio (other accounts), so I'm debating whether to go in now or wait. I'll do some SPY LEAPS, and rest regular ETF buys.
 
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