Still learning, so please forgive the naïveté!
If using PMCC’s, would the idea be to roll the ITM LEAP? Or to sell before theta decay eats away too much?
If the short OTM call goes in the money, how would this affect the LEAP? Would you need to exercise to cover the shares on the short call?
Posted by EverlockLeo
1 Comment
>If using PMCC’s, would the idea be to roll the ITM LEAP? Or to sell before theta decay eats away too much?
Not actually relevant to PMCC, just in general to a LEAP. Typical recommendation is to start “managing” it around 75-90 dte to make sure theta decay is handled. How you manage it depends on what you think the long term outlook is for the underlying. “Rolling” is just selling your current contract and buying a new one, either at a different price and/or DTE. Its two transactions bundled. Rolling or selling will still trigger a taxable event in the case of a taxable account.
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>If the short OTM call goes in the money, how would this affect the LEAP? Would you need to exercise to cover the shares on the short call?
Typically these are setup where the LEAP moves up at a faster rate than the OTM short dated call that was sold. Meaning usually more beneficial to sell the LEAP since can capture the extrinsic value still left. If exercise the LEAP that would work too, as far as satisfying the short call, but would instantly burn your extrinsic value that was left in the LEAP. In almost all cases exercising the leap would be a sub optimal way to fulfill the short call obligation.