Updated: Apr 8
Trading Long-Term Options (LEAPS) has some nuances. The Delta of the option (ATM) is higher (60-70) and also the Vega is higher, thus a lot more sensitive to the option Implied Volatility.
Another thing to keep in mind is that we have to estimate the amount of Dividends that we will not get as an option holders ("Loss of Dividends"), where as the stock holders will get the dividends during the life of the option.
Also an increase in Interest Rates will make the options more valuable (however I don't expect them to raise during the following years).
One advantage of using LEAPS for speculation is that they do not decay at a rapid rate, so the timing of the purchase timing does not have to be exact.
Other advantages are capping your risk (to the premium paid) and using your capital more efficiently.
Trade example : EWW (Mexico ETF).
At the end of April20 I could buy C31 until Jan22 (20 months) for 3$.
EWW was trading at 28.6 after falling from 47$ in Feb.
The Loss of Dividends to be expected was about 0.5$ for every 6 month (if the virus won't reduce that). Also we can exercise the option before the DEC21 dividend, so its about 1.5$ for the whole period.
So the BE point was 33.1$ (28.6+1.5 div + 3 option premium), which was 15.7% for 20 month.
Not a lot considering the sharp decline due to the pandemic.
By the end of July I bought more options at 4.7$.
The first target is 47$ where the call will be worth 16$, (3:1 R:R ratio).
But given the long time until expiration and the possibility for a world growth after the pandemic is over, I can see it go even to 65$. See the monthly chart:
Now let's look at India (INDA ETF):
Now the ETF has already returned to its previous resistance level. So the speculation is that it will BO up in the next 2 years.
Being bullish on INDA economy and recent developments there from a Macro perspective, I see interesting R:R here too, despite the big move up from Mar lows.
Lets calculate the BE point and loss of dividends:
Its only 0.3$ a year, so buying ATM call for 5.4$ where the ETF is at 36.4, the BE point is at 42$ (15.4% up).
You also need to check the SKEW and check the IV:
Do you prefer holding the ETF directly for the next 2 years ?
Or risking just 15% of that money (premium paid), and going for a BE point that is 15.4% higher.
The answer depends on your view of the possible change in the INDA etf price.
If you believe that it can easily go to 55$ (50% up in the next 2 years), then the call will be worth 19 (2.5:1 R:R).
One last thing, holding LEAPS long is similar to holding the underlying assets for the purpose of selling short term covered calls. Whenever you see the market going into sideways market type when it hits resistance, or after it lost momentum, you can sell short term Calls against your LEAPS and earn some more premium.
April 8th Update:
Lock-in gains in EWW using put bear spread 40/31:
Waiting for the BO out of the consolidation: