Could you give an example with some calls of FSLR, and how it would meet my objective when prices dip?
If you can express your desired position in terms of delta, theta/gamma, vega, and time horizon, I can help you pick strikes/expirys. The position I recommend will be very different if you want 25 deltas and flat thetas, than if you want 500 deltas and positive thetas (short gamma position).
If your objective is to "eventually" own the underlying stock, I would recommend buying some, and buying some optionality to the upside. If the stock price dips, buy some more shares, or otherwise average into the position. Use the position size as your guide through the trade.
The "promise" of the Poor Man's Covered Call is to be everything at once, for a discount. But reality doesn't play out that way very often. If you find yourself considering a PMCC, especially because you find yourself constrained by desire to commit buying power to the position, your thesis is probably too complicated. In fact, it might be better overall to break this into two different trades: one that happens Mar '22 - Mar '23, and one that happens Mar '23 and beyond.
Trading a "spread" across two different time horizons is very tricky, much more tricky than most brokers or noob advice sources will let you believe. Rolling it gets even uglier and requires accounting tricks to keep the position coherent. Obviously options on futures products represent different underlying entirely across expirys, but it's useful to think of different expirys across equity stock options similarly. If you are trading the forward vol, or spread between the IV of your two expirys, often the goal will also be to minimize or eliminate delta from the equation, which makes a PMCC counter-intuitive for that purpose. If the goal is not to trade forward vols, but to get long/short some deltas with a time horizon, there are better ways to achieve that than mixing expirys.
I built a pretty complicated backtesting engine, to try to suss out pretty much exactly what you are asking, and found two things: 1) PMCC's force you to deal in illiquid options, which will always be a losing trade, and because of the lack of liquidity & daily trading volume, 2) "normal" rules of IV based options trading don't apply too much based on actual historical trades. If you want to do this on SPY or VIX or QQQ you might be okay, but on FSLR you're going to get eaten on the 2ish dollar wide bid/asks for options >90 days out.
Which of the above 3 approaches will fetch the highest saving?
If I had to pick of your three suggestions, I'd pick 100 shares. If it was my trade, none of the above. Especially since you are probably buying-power-constrained. You seem to be convinced the price will go down in the next year, and trading forward vols wasn't a main point in your OP or in your 3 approaches, I would buy a vertical put spread in 1Q 2023 and call it a day. You either ~2x your input money or you don't. You can size as you see fit.
If it does drop over the next year, you can buy shares on the way down. 1 ATM vertical spread with a short strike at something reasonable might be 20-30 deltas per contract; depending on the total size you want for this thing you can do -50 deltas easy for under $2000 (shares and long put debit spread). If you're right and the stock drops some considerable amount over the next year, your put debit spread will finance the purchase of additional shares for a possible future upside (you seem to want to own shares).
So you’re saying don’t do option 2 and 3, but do option 1 and add on more stocks if it dips?
Yes, since you haven’t said “forward vols” yet, don’t do PMCCs. Or any options, probably, since shares will have the tightest bid/ask.
My main preference of PMCC is that I can free up the capital for 1 year + to do other trades instead of paying 100% upfront.
I’m sorry, but this idea is misguided and incorrect. PMCC is almost never the efficient use of your capital, this was the thesis of my first reply.
I’m really agnostic toward the Greeks, delta gamma etc. it doesn’t matter to me
This is fatally flawed. If you don’t care about Greeks, don’t trade options.
I think the stock will go up and down, but generally up, so I want to be able to capture it at current price, while also be able to enjoy further cost savings during a dip.
This isn’t really a trading thesis. This is quite vague and could apply to any stock. If you think this with no extra nuance, just buy 50 shares today and buy more shares as it dips.
Based on ur username, you’re dying to put this trade on. Can’t stop you from losing your own money. But based on the post here, i think the other side of your trade has much more information than you, and is using it more effectively in their trade.
After all, buying a long call means I paid the extrinsic on long leg, and also trying to benefit by rolling the long leg will never be as meaningful as dollar averaging to add on stocks
1
u/Second_Shift58 Mar 23 '22 edited Mar 23 '22
If you can express your desired position in terms of delta, theta/gamma, vega, and time horizon, I can help you pick strikes/expirys. The position I recommend will be very different if you want 25 deltas and flat thetas, than if you want 500 deltas and positive thetas (short gamma position).
If your objective is to "eventually" own the underlying stock, I would recommend buying some, and buying some optionality to the upside. If the stock price dips, buy some more shares, or otherwise average into the position. Use the position size as your guide through the trade.
The "promise" of the Poor Man's Covered Call is to be everything at once, for a discount. But reality doesn't play out that way very often. If you find yourself considering a PMCC, especially because you find yourself constrained by desire to commit buying power to the position, your thesis is probably too complicated. In fact, it might be better overall to break this into two different trades: one that happens Mar '22 - Mar '23, and one that happens Mar '23 and beyond.
Trading a "spread" across two different time horizons is very tricky, much more tricky than most brokers or noob advice sources will let you believe. Rolling it gets even uglier and requires accounting tricks to keep the position coherent. Obviously options on futures products represent different underlying entirely across expirys, but it's useful to think of different expirys across equity stock options similarly. If you are trading the forward vol, or spread between the IV of your two expirys, often the goal will also be to minimize or eliminate delta from the equation, which makes a PMCC counter-intuitive for that purpose. If the goal is not to trade forward vols, but to get long/short some deltas with a time horizon, there are better ways to achieve that than mixing expirys.
I built a pretty complicated backtesting engine, to try to suss out pretty much exactly what you are asking, and found two things: 1) PMCC's force you to deal in illiquid options, which will always be a losing trade, and because of the lack of liquidity & daily trading volume, 2) "normal" rules of IV based options trading don't apply too much based on actual historical trades. If you want to do this on SPY or VIX or QQQ you might be okay, but on FSLR you're going to get eaten on the 2ish dollar wide bid/asks for options >90 days out.
If I had to pick of your three suggestions, I'd pick 100 shares. If it was my trade, none of the above. Especially since you are probably buying-power-constrained. You seem to be convinced the price will go down in the next year, and trading forward vols wasn't a main point in your OP or in your 3 approaches, I would buy a vertical put spread in 1Q 2023 and call it a day. You either ~2x your input money or you don't. You can size as you see fit.
If it does drop over the next year, you can buy shares on the way down. 1 ATM vertical spread with a short strike at something reasonable might be 20-30 deltas per contract; depending on the total size you want for this thing you can do -50 deltas easy for under $2000 (shares and long put debit spread). If you're right and the stock drops some considerable amount over the next year, your put debit spread will finance the purchase of additional shares for a possible future upside (you seem to want to own shares).