As part of the strategy I started implementing over the past week or so I added some EEM LEAPS this morning when my limit order hit as EEM dipped. The spreads on the VWO LEAPS were even bigger than the shorter term options, so instead of trying to mess around with it I went straight back to EEM. While EEM was trading at $46.43 I sold one EEM January 2012 $50 naked put for $7.05 and received $704.29 after commissions.
I don’t know how many more (if any) EEM LEAPS I’ll add to this one, but I felt I needed some longer term international exposure to go with the much larger allocation towards US stock ETFs. I might add one more to this position sometime in January to give myself closer to 10% allocation towards emerging markets. I want to leave some cash readily available to see how the year starts off. For this trade I have 14.1% upside (13.1% annualized) and can handle a 7.52% drop in the underlying before I have a paper loss. I need EEM to gain 7.64% for this option to make it to the in-the-money strike I sold, but even if it stays flat I’ll gain 8.15%. I think EEM has another 10% left in it during 2011 and wouldn’t really be surprised to see it return 15%. If it does return 15% I’ll still only make 13.1%. I don’t consider that a bad downside, especially since I’m running with potential margin and if I increase my over commitment to 150% of my account that 13.1% could be more than a 19.5% return.
If we get a 10% correction in the next few months I plan to take my potential option assignments as high as 200% of my account value like I used to. The difference between now and then is that I don’t think there’s much of a chance of a 20+% bear market hitting us in 2011. I expect at least a couple of 5-6% drops and maybe one 10% drop, but that should bring out the buyers. By using these LEAPS I should be able to weather these little drops without feeling much pain. If any of these LEAPS are assigned early I’ll just have my gain locked in earlier than planned and will be able to sell out-of-the-money covered calls that much sooner.
Do any/many of you use LEAPS more often than short duration options?
