Rolling LEAP Calls

[ChemEng]

Looking to expand my investing horizons, I came across Rolling LEAPs. Im really intrigued by how it combines the economic efficiency of an option with the ease of a BAH investment. Does anyone have experiences with these?

Here are some articles that talk about Rolling LEAPs:
http://www.investopedia.com/articles/optioninvestor/07/rolling_leaps.asp
http://www.forbes.com/personalfinance/investoreducation/2007/05/08/options-leaps-pf-education-in_gc_0508investopedia_inl.html?partner=links
http://www.indexroll.com/leap/index.htm

Anyone?

[Birchtree]

Here's another look:

http://www.safehaven.com/article-8492.htm

[ChemEng]

I missed that article Birch thanks!

The more that I look into it Im beginning to think that its not as promising as I originally thought.

One of the downsides of options is that you dont get dividends. This isnt usually a big deal because of the length of the option contract. But with length of LEAP contract, not receiving dividends is a much bigger issue because of compounding.

Im going to think about it some more this weekend and rub some numbers together to see how the lack of dividend plays out versus buying the asset itself.

[ChemEng]

So Im thinking this isnt what I thought initially.

Using their numbers (which is an ideal case),

You are borrowing $110 for $6.40. So it 'costs' you 5.8% to borrow the $110. But they did not factor the missed dividends that would result in holding SPY (the yield). This results in another 1.78% lost, which increases the interest rate for borrowing that $110 to 7.58%.

That still leaves room for leverage to take advantage of the average 10% returns. But if volatility catches you on a year you have to roll, then you could be forced to loose alot of value.

[nelsonal]

Hi, I've been using options for the past few years, and have found two things to generally be true. First, a long call strategy would be most effective, if you stick to deep in the money calls, (20-30% below the at the money strikes) rolled would keep your annual holding costs very low. Most of the time in the money options are a cheaper way to add leverage than a margin for what is effectively the same position.

Aside from that, look to write options if you want to make any money in the game. Calendar spreads are a decent idea to cut some of that holding cost, you're very exposed to a very large decline but stand to make nice money in stable or rising markets.

Options are fun, but like bonds are very mathmatics driven. Know your broker's option margin rules (they vary somewhat among most of the brokers). Make sure you are familiar with the major models (binomial and B-S). Finally, start slowly because leverage can be difficult to control at first, and most of us make a few mistakes while learning the game. Also, remember that options are where people with the best information play, so be very wary of things that look too good to be true.