Would like to hear your opinoin on buying deep in the money leaps on the SPY as a form of leverage. Say SPY now 450, buy ITM call strike 225 expire nov 2023.
"Downpayment" 225, "loan" 225. effectively leveraging 50%.
I get what you're getting at, but these particular LEAPs aren't a great trade either. Less bad than leveraged ETFs, but options have their own quirks that will trip you up and cost you money.
"Interest" = extrinsic value, spread and lost dividends which isnt much since its too deep, decent spread due to liquidy and spy has low dividends. Probably matches ibkr llc 1.58%pa
Isnt't this better than a margin loan because
1) no margin call resulting in force selling
You don't get force-sold through margin calls, but you could certainly get "force-sold" if the stock ends up below the strike.
I see this better in every way than a straight margin loan. Is there anything im missing.
Couple of things:
1) Liquidity: the spread in the options is about three bucks (that's $300 a contract). Even if you have the time to work a bid and get filled closer to the mid, you'll still be paying a lot more to get into the trade than you would if you just bought leveraged SPY;
2) Time decay: there's about five dollars of extrinsic value in that option, which you're going to be bleeding away over the course of the next two years. It might not sound like much, but that's a couple of percent a year, which is a HUGE amount of drag.
3) There's a big problem with this particular strike: missing out on the dividends. For a deep-in-the-money option, there comes a point where the dividends are worth more than the extrinsic value of the option, and you'd rather just be long the stock. SPY pays about $5.20 a year of dividends; by buying the options instead of the stock, you're giving up on that.
A professional trader, if they found themselves long those SPY options that you're thinking of buying, would immediately exercise them because they'd rather own the stock instead. That should give you a clue how much you don't want to own these.