Enhanced Indexing Strategies: Utilizing Futures and Options to Achieve Higher Performance

CHAPTER 11

LEAPS Puts and Three Ways to Profit

In the last chapter, we demonstrated that put option spread positions can be used to cost-effectively limit downside risk or as components of an investment portfolio that generate profits based upon index behavior. Spread positions are more cost-effective than using puts alone and provide a variety of both long and short alternatives.

In this chapter, we introduce three different strategies that use long LEAPS put options to either protect a portfolio or generate additional return. The first strategy is an out-of-the-money bear put spread, also known as a speed bump. This position provides cost-effective portfolio protection, and thereby allows an investor to take on additional leverage with a sharply reduced risk of catastrophic failure in the event of a poor return. Additional protection can be achieved through diversification, and two techniques for modeling diversified but correlated investment portfolios are shown here.

The second strategy presented in this chapter uses LEAPS calendar put spreads to generate high returns. These put spreads are extremely profitable but have both long holding periods and relatively high standard deviations. LEAPS calendar put spreads can be used in a repeated strategy, and a historical performance analysis is presented using a diversified fund made up of three S&P 500 sectors with low correlations.

The final strategy is a monthly put writing strategy in which LEAPS put options are used to secure ...