<30% in LEAPs and >70% in Treasuries/Cash
Proposing to have a large portion (>70%) in Cash and Treasury ETFs. Remaining <30% can be invested in LEAP options in chosen ETFs/Stocks. (SPY, IWN, QQQ etc)
- Cash and Treasury ETFs will be available to draw-down if necessary (>70%)
- LEAP Options hold for > 1 year to incur only LTCG
- Limit overall exposure to stocks you may consider appropriate ( say 60% or 80%)
Options have an image of Wild Wild West, but LEAPs can be used to build a conservative portfolio..LEAP options (or LEAPs) are option contracts that expire at least one year from the date of purchase. The acronym LEAP stands for “Long-term Equity Anticipation.” LEAPs are more affordable than stocks because they're offered at option contract prices.
When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP is taxed at the long-term capital gain rate if they held the contract for at least a year and a day. If they held the contract for a shorter period, they would be subject to short-term capital gains rates.
Look at the example of SWAN ETF.. https://amplifyetfs.com/swan.html
Approximately 90% of the ETF will be invested in U.S. Treasury securities, while approximately 10% will be invested in SPY LEAP Options in the form of in-the-money calls.
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SWAN Holdings 10% in SPY Options SPDR S&P CLL OPT 6/20 245 SPDR S&P CLL OPT 12/20 283 90% in Treasuries TREAS NTS 1.5% 10/31/2021 TREAS NTS 1.625% 11/15/2022 TREAS NTS 1.5% 10/31/2024 TREAS NTS 1.625% 10/31/2026 TREAS NTS 1.625% 08/15/2029 TREAS BDS 2.25% 08/15/2049
SWAN invests 10% in SPY options gives <75% exposure to stocks - giving a 75/90/-65 exposure
Below is the proposal.
Say you are investing $100,000 in such a portfolio
>70% - invest in Treasury ETFs..
Combination of Cash, STT, ITT and LTT as you consider appropriate
STT - SHY/VGSH - 30%
ITT - VGIT - 20% ,
LTT - VGLT - 10%,
exLTT - EDV - 10%
<30% - Buy LEAPs in stocks and/or stocks
SPY - S&P 500 ETF
IWN - iShares Russell 2000 ETF
QQQ - NASDAQ 100 ETF
maybe Stocks (FB any others?)
Consideration for ETFs or stocks
1. ETFs/Stocks must be highly liquid with LEAP options available
2. ETF/Stock price must be low enough (As a thumb rule <$350)
3. LEAPs > 1.5 years away, to make sure you only get Long Term Capital gains LTCG.
4. Use Limit orders to purchase.
5. Option strike price deep in the money. (<< current price)
6. Keep overall exposure to stocks to under 80%
1. LEAP option may end up being worthless if ETF/Stock price drops/remains low over >2 years
(right now SWAN behaves like a treasury ladder because its SPY options dropped from 10% to 4.72%)
ExampleWhat is the downside risk of the LEAP options?
The value of the S&P 500 LEAP call options can go to zero; however, it would take an extended significant decline in the S&P 500 for
this to happen. Typically, the S&P 500 LEAP options will retain some time value even if they are out of the money. And the LEAPS
within BlackSwan only comprise approximately 10% of the portfolio.
SPY DEC 16, 2022 180.00 CALL @ $60 -- $6000
(with SPY @220 one leap option gives exposure to $22,000 invested in S&P 500)
IWM DEC 16, 2022 80.00 CALL @ 20 -- $2000
(with IWN @100 one leap option gives exposure to $10,000 invested in Russell 2000)
QQQ DEC 16, 2022 140.00 CALL @ $45 -- $4500
(with QQQ @180 one leap option gives exposure to $18,000 invested in NASDAQ 100)
FB JAN 21, 2022 150.00 CALL @ $25 -- $2500
(with FB @150 one leap option gives exposure to $15,000 invested in Facebook stock)
I have purchased SPY LEAPs via limit orders last time SP500 dropped. Plan to purchase additional additional LEAPs if and when stock prices drop via GTC Limit orders..
Please give your feedback on such a portfolio. What are risks of such a portfolio? Would this be appropriate to hold in taxable and/or ROTH IRA?