FundRobot » Indexed Funds » rolling options question?

Old   #1 (permalink)
Posts: 2,643
Default rolling options question

Is it possible to roll index options for an extremely long period of time, say 40-60 years?

The general idea would be to buy a 2 year index option, and exchange it for another 2 year index option every year. Also, the option would be pretty deep in the money, so I can minimize risk.

Will I be able to magnify the long term return of the stock market, to possibly get a 15% return on average instead of an 8% average? Or will events like the 2008 crisis wipe me out and not allow me to roll the option?

Thanks for the help.
Happiness45 is offline   Reply With Quote
Old   #2 (permalink)
Posts: 2,526
Default rolling options question

You can always roll, but I don't see your strategy. You could just buy an index fund and forget about it. Buying an option means that you are also paying for the time value, which erodes.

A better strategy is to buy a LEAP and sell current month calls against it when there's a pop in the underlying, then buy back the call when the call's value drops. The time decay for that month is much higher than for the LEAP, so that's where the bulk of the profit is over time. Once in a while, the call you sold will really drop (because the underlying did). You just buy it back and wait for another pop to sell the current call again.

When your LEAP gets to about 3 months of life left, roll to another LEAP dated out 2 years - otherwise you've got the almost the same decay as what you sold for that month. You're doing at least two trades a month, so budget for that. You sell a strike above your LEAP, so there's also a margin requirement. You should exceed 20% return with this strategy, which is best suited for low-volatility stocks that don't pay dividends.
TopGear.12 is offline   Reply With Quote


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