Monday, November 18, 2013

Quantifying the LEAP

Quantifying the LEAP: TSL Trina Solar Co.

At the risk of defeating my purpose of Long Term Holding of the LEAP strategy, here is a fine tuning of the TSL trade - a stock that has run up recently. It sacrifices Risk for Reward by rolling up Puts and Calls with the stock, and moving out  in time to 2016 as well.
                                                                        DEBIT          CREDIT
Aug. 2013: Bought 500 TSL at $8.97  :          $4494
            Sold 5 2015 Leap Calls - 10-strike:                            $1211
            Sold 5 2015 Leap Puts - 7 strike:                                $937
Oct 29: With stock "Leaping" to 15,
            Rolled 7-strike Puts up to 10:                                     493      (net of  936-443)        
Nov.18: Rolled Calls from 10-strike to 15        596                           (net of 4093 -3496,
            and out to 2016                                                                       releasing $2500 call
If called in Jan.2016 at 15:                                                     7500

                                                TOTAL:          $5090              $10,141

Current position: In the money covered calls, with stock at $16.77. Per cent profit if called away at 15 or above: 99% over 2 1/2 years (without further tweaking- TSL pays no dividends; most commission costs are included).

If stock settles between $10 and 15 ON! January 2016 expiry date, keep all option money, but paper loss of  $2500 on stock - $5 on 500 shares. Put on another Leap Strangle at current prices, e.g. $12 Call and $7 Put for 2018.

If TSL falls below $10 in 2016 expiry, you will have to buy back Put or take on 500 shares stock and do another OTM strangle.

If done in an IRA account, one must allow for the cash up front requirement of the puts - $7 X 500 ; in a margin account marginability of the stock bought plus Put and Call receipts should cover margin req., although minimum account margin ($5000?) is also required in an account.

Monday, November 11, 2013


Subsequent to my talk before the S.F. Bay Area Options Group last month, I decided to update my LEAP portfolio for YTD (year so far) results. I was happily surprised that the amount earned on paper ( marking to the market as no trades have been completed) was so high. Entry into these 15 trades was staggered, starting in Dec. of '12, then pretty much monthly up until October, so I did not expect much profit, especially from the later trades. Much like a long distance track race, each stock starts at a different place, but ends simultaneously, on January 2015, for those Leaps, although I have started doing 2016 Leaps, now that they are out as of October expiry.

Despite several dubious candidates ( e.g., gold, metals) that have underperformed short term - expected to rally by 2015- there were counterbalancing trades such as NOK, RAD, TSL and F that rose enough over their short time to allow a rollout and up with the puts.

Bottom line, of the $60,000 invested over 2013, current profit is just under $7,000 for an 11.67% gain, due to the consistent decay of both calls and puts sold, with an occasional dividend thrown in. There are several metal stocks "under water" (below the Leap put price, which, if they do not rise by Jan.2015 expiry, will force me to take on more stock, do another Leap strangle two years out, and lower down in price - since I already own the original shares there is no cost basis there!

I have run this by several option "experts", such as people in the SF Option Group, Alex Jacobson - the prior instructor at the CBOE , and my old Schwab team who handle Friends of Chuck. Possible risks, but very minor, are total bankruptcy, and either a merger or takeover which have variable consequences. One such high risk trade could be on JCPenney, around for a century or so: a 2016 strangle brings in an immediate 75% return  of principal (no dividend yet). At expiry, another 2-year strangle should double one's money, no matter what the price of JCP. Caveat Emptor!

Obviously, stocks in the $5 to $15 range will probably not be the highest quality, but early profits and exits are also likely, although LEAPs needs very little monitoring or tweaking. My estimates are 20 to 60% returns, with annualized returns in the 20%s.