pb4uski
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I recently bought some SPY Dec 2023 LEAPS as an equity substitute. In Dec 2023, I'll receive the then current value of SPY over the strike of 400, but I will not receive SPY's dividends between now and then. I'm debating with myself how to calculate my AA.
Hypothetical numbers. George owns 14 SPY LEAP contracts expiring in Dec 2023 with 400 strike... hypothetical cost was $100k... current value is $100k. Let's say SPY is currently trading at 435. Notional value is 14 contracts * 100 shares per contract *$450 price or $609k. In addition, George owns $900k of bonds. Total portfolio value is $1m.
View A: AA is 10/90... $100k LEAPs value/$1m total = 10% and $900k bonds/$1m total is 90%.
View B: since the options allow me to participate in changes in the value of SPY, I need to adjust my AA to reflect that. Substitute $609k notional value for $100k option value... so total is really $1,509k, with equity of $609k/$1,509k = 40% and fixed is $900k/$1,509k =60% so a 60/40 AA based on equity exposure and participation in rewards and risk. (though risk is limited to a loss of $100k the upside is theoretically unlimited).
ETA: View C: since the LEAPs is a stock substitute strategy, the $100k of LEAPS plus $509k of the $900k in bonds is similar to owning $609k of SPY directly... so George has $609k of equities and $391k of bonds for $1m total... or a 61/39 AA.
Other possibilities?
What do you think?
Hypothetical numbers. George owns 14 SPY LEAP contracts expiring in Dec 2023 with 400 strike... hypothetical cost was $100k... current value is $100k. Let's say SPY is currently trading at 435. Notional value is 14 contracts * 100 shares per contract *$450 price or $609k. In addition, George owns $900k of bonds. Total portfolio value is $1m.
View A: AA is 10/90... $100k LEAPs value/$1m total = 10% and $900k bonds/$1m total is 90%.
View B: since the options allow me to participate in changes in the value of SPY, I need to adjust my AA to reflect that. Substitute $609k notional value for $100k option value... so total is really $1,509k, with equity of $609k/$1,509k = 40% and fixed is $900k/$1,509k =60% so a 60/40 AA based on equity exposure and participation in rewards and risk. (though risk is limited to a loss of $100k the upside is theoretically unlimited).
ETA: View C: since the LEAPs is a stock substitute strategy, the $100k of LEAPS plus $509k of the $900k in bonds is similar to owning $609k of SPY directly... so George has $609k of equities and $391k of bonds for $1m total... or a 61/39 AA.
Other possibilities?
What do you think?
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