Post #2250 by TGMark on the Mechanical Investing board

Investment Strategies / Mechanical Investing

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First, if the strike is above the price, you are buying time value, which is a wasting asset. If you get it well below 30.00, you are getting intrinsic value that does not waste away. Also, there is the delta. If the strike is well below the 30.00, the delta is close to one, so for every dollar the stock goes up, the premium could go up 2.50 or so. I think that is the correct way to use leaps.

Thx, I will have to think about that. You are saying to only purchase in-the-money calls?

The whole premise is that the underlying stock price will have a recovery and rise over the term of the leap. That of course is a gamble.
Assuming it does, then you can assume some values; for example it rises to $60, or $90, or $140, or $180 sometime during the period.
For each of those scenarios, you calculate a total return based on buying the various strike prices listed above.
You get a lot of leverage from the farther OTM calls - if the stock price rises sufficiently of course.

Mark

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