Let's say you're fine with buying the LEAPs 2 years out (712 DTE). Wouldn't buying a 0.6 delta long call be totally fine in this scenario?
I could be wrong since everywhere I see people say to buy deep ITM to mimic owning shares as much as possible (.8 – .9 delta), but here's my thought.
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Lower delta means you can buy more contracts assuming a fixed cost ($100k gets you more contracts at .6 delta than .8 delta)
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With more contracts, you can sell more short calls and generate more premium. I always sell .1- .15 delta short calls no matter what as a matter of principle…so even if I had a higher delta long call (e.g. 0.8 or 0.9), I'm not sure if I would benefit from the fact that you can then sell higher delta short calls. Usually people recommend selling 0.3 delta short calls and buying 0.8 long calls. Again, I would still probably stick to 0.1-.15 delta short calls to avoid the risk of needing to roll or being assigned.
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Lower delta means you actually lose less money if the stock goes down since it's less sensitive to stock price movements. The downside is that you also gain less money when the stock goes up, but you're already pretty heavily leveraged + the premiums you're making are pretty decent. This is obviously a tradeoff, but IMO since it's still far more leveraged money than owning a share of stock, I don't see this as a huge issue.
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With 712 DTE, you're not really running the risk of theta decay affecting you – you have two years before being way too OTM causes you to lose all your money. By that point you should have been rolling down or out to higher deltas anyways.
Obviously my scenario presented has a bunch of custom rules that only apply to me – but given my conditions, is it totally acceptable to buy a 0.6 delta long call?
Poor Man’s Covered Calls – why should the long call be > 80 delta? (assume 712 DTE LEAPs)
byu/Temporary_Bliss inoptions
Posted by Temporary_Bliss
2 Comments
The position is called a diagonal calendar.
Further in the money reduces theta decay and extrinsic value
Some general trading perspective on the position…
https://www.reddit.com/r/options/wiki/faq/pages/diagonal_calendars
The high delta means there’s low theta decay. The aim of the pmcc is to make the position theta positive. So lowering your delta is not advantageous.
On top of that a lower delta on the long leg also means the difference between the delta of the two legs. This means when the stock starts rising, your net gain in premium is reduced.