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June 30th, 2008 at 2:14 pm
Allan- I’m going to look at some ETFs, although my analysis so far suggests that the front-month options don’t pay as well as those of individual stocks. I’m going to have to write something up about that to clarify it, but at a simple level, calculate the per-month (expiration period) cost of the LEAP, and compare it to the monthly premium (extrinsic value) available on on the fronts.
I have seen a lot of stocks where the ratio is almost 3:1 in your favor, where on ETFs it tends to be less, 2:1. The thing I’m unsure about is whether the reduced volatility of the ETFs and tighter brackets raises the "win rate" on your monthly fronts. If so, it might counter-balance the lower premiums.
Aargh, there’s always more research to do. I’ve been meaning to pull a spreadsheet together to follow this, so I’m going to have to give that a try before I start committing positions. As I said before, stay tuned.