Options

[Peticolas]

What are your thoughts on using deep-in-the-money (DITM) options to represent portfolio positions? By DITM, I mean options with a delta very close to or at 1. This strategy allows for exposure equivalent to holding shares, while the money saved by not buying the equities or ETFs could be invested in GSY to earn 5.5%.

This approach isn’t feasible for small portfolios. For example, one call option on NVDA represents an almost $100,000 exposure to the stock. Additionally, the execution price on the option might not be as favorable as on the equity or ETF. However, I believe the returns from GSY would more than offset this difference.

I’ve noticed some of you use options in your portfolios, so I wanted to ensure I’m not overlooking any important considerations.

[Frank1 Grossmann]

This is no problem as most of the top companies in the Nasdaq strategy have very liquid options. You can also write ATM (at the money) options in stead off writing nearly Delta 1 DITM options. This gives you a nice downside buffer. If you write 30 day DTE options you can let them expire around the normal rebalancing date.

[Peticolas]

Thanks Frank. That makes sense. Generally better to sell options than to buy. And if the delta on my DITM calls declines, I would see theta decay.

[johnwalshetribute]

#@Frank

can you explain more on this
“You can also write ATM (at the money) options in stead off writing nearly Delta 1 DITM options. This gives you a nice downside buffer”

this means collecting premium by selling put potion for 4 Nasdaq stocks for expiry at end of month for strike price = current price ?

and keep this premium by letting option expire if price moves up and take delivery and sell stocks at end of month if price goes down ?

or you meant short straddle where ATM call and Put options are sold together ?

[Peticolas]

johnwalshetribute, the way I’ve ended up using this is to buy DITM calls dated about six months out. Why so far out? Although DITM calls are mostly intrinsic value, there is some extrinsic value and the decay of that extrinsic value is much slower for longer dated calls. If I’m holding a position for awhile, and the options reached 3 months to expiration, I would roll them back out to six months. and if the volatility and premiums are right, I sell out-of-the money calls 30 days out. Thirty days aligns with LI’ rebalance period, but it is also the time when the extrinsic value of options begins decaying very quickly, which works in your favor. On a stock or index with high implied volatility, you can often collect a nice premium for options that are 3.5% to 4% out of the money. Now you can lose out if the stock or index has a bonkers move over the month, but that’s rare. Still, if the implied volatility and premiums for those out of the money calls is not pretty rich, I don’t sell them.

This also works on the put side if the portfolio calls for a short position, but you do have assignment risk. Normally, the extrinsic value is high enough that it doesn’t happen, but I avoid selling puts on TLT because the extrinsic value there is so low, even six months out (and especially 30 days out), that it’s not that unlikely that someone would exercise at dividend payment time.

Bob

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