• Ocean Man
    Many people in Stocktalks have said "I wish I could sell a covered call on $AAPL, but I can't afford 100 shares." I present the Fig Leaf.
    12/30/12
    Reply (29)
    • Ocean Man: 100 shares would cost $51,000, and most people agree that you shouldn't have one stock be much more than about 20% of your portfolio,
      12/30/12
    • Ocean Man: so you'd really need about a quarter mil. However, let's look at some January 2014 deep in the money LEAP calls, also known as "stock
      12/30/12
    • Ocean Man: replacement". The $350 strike, for example, costs $170. Now you're controlling 100 shares for $17,000, a 2/3 discount to buying the stock.
      12/30/12
    • Ocean Man: $350 plus $170 = $520, so you're giving away the first $10 of gain, but that's less than 2% and this call covers a whole year. A second
      12/30/12
    • Ocean Man: drawback is that you won't collect the dividends. However, on the flip side, your downside is capped at $350, whereas stocks can go to zero
      12/30/12
    • Ocean Man: (and one analyst's price target is $270 at the moment). And let's not forget you're saving $34,000 on this purchase. Those are the pros and
      12/30/12
    • Ocean Man: cons. But there's one more pro. The reason this is called the Fig Leaf is because you're sorta covered. You can sell covered calls against
      12/30/12
    • Ocean Man: this. Say you'd be happy with a $5,000 gain on the 100 shares you control. First off, notice that would be a 29% gain on your LEAP
      12/30/12
    • Ocean Man: vs. a 10% gain had you bought shares. You could sell a covered call at $570 to cap your gain at $5,000 and receive another $4,600 for the
      12/30/12
    • Ocean Man: covered call. Some prefer to sell calls 3 months out multiple times over the course of a year, you could do that too. You could make $9,600
      12/30/12
    • Ocean Man: or 56% on this play with a downside risk of $17,000 (less than the downside risk of the stock) giving away the 1st $10 of gains + dividends.
      12/30/12
    • Ocean Man: And it's affordable to a lot more people.
      12/30/12
    • Ong Kang Wei: Great method OM! Thanks!
      12/30/12
    • Hillbilly Stock Star: NIce OM!
      12/30/12
    • 1980XLS-2.0: Sell Mortimer, Sell. http://bit.ly/WUoKaf
      12/31/12
    • Noreika: Like a boss!
      12/31/12
    • hotnutsjesus: Great advice OM,thanks for sharing.
      12/31/12
    • Maria Auziliadora: Good one OM
      12/31/12
    • Dr. Kris: Never heard a calendar spread being called a fig leaf but I like it. Don't forget that time decay takes a bite out of your LEAP's value...
      12/31/12
    • Dr. Kris: ...should the stock not move which is another reason to sell calls against it. As with any options plays, there is an art to this as well.
      12/31/12
    • Ricardo Espinosa: Nicely explained OM.
      12/31/12
    • The Money Man: OM - i might have missed something but how can you sell covered calls against the leap long call? not all brokerages will allow this?
      12/31/12
    • Ocean Man: It's covered in the sense that a call spread is covered, thus the "sorta covered" name.
      12/31/12
    • Ocean Man: Dr Kris - the idea is that the time decay will hit the out-of-the-money call you sold much more than the deep-in-the-money call you bought.
      1/1/13
    • Ocean Man: In this example, the call you sold had $46 of time value and the call you bought only had $10 of time value. The beauty of that, is that
      1/1/13
    • Ocean Man: $AAPL could drop $36 per share and you'd still come out even at expiration.
      1/1/13
    • Dr. Kris: OM: Right. My point is that you'll need to sell calls against your LEAP to guard against that $10 loss should the stock...
      1/3/13
    • Dr. Kris: ...not advance at least $10 above the strike price @ expiration.
      1/3/13
    • Dr. Kris: I like to buy the LEAP when stock is at relative low, sell front-month call at relative high, buy back call when stock dips, rinse & repeat.
      1/3/13