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I just wrapped up my third book on buying LEAPS, and this one brings a fresh perspective. The author suggests allocating 20% of your portfolio to an at-the-money (ATM) LEAP on SPY, with the remaining 80% invested directly in SPY shares. The entry signal he recommends is quite specific: buy in when SPY closes above its 200-day simple moving average (SMA) for 5 out of 10 trading days. Conversely, you should buy a put LEAP on SPY when it finishes below the 200-day SMA for 5 out of 10 trading days. He's tested this strategy extensively, starting from early 2007 until the book was written, and it has significantly outperformed the S&P 500.

My concern with the strategy lies in its use of ATM options, which are prone to substantial time value decay. If you opt for deep-in-the-money (DITM) options instead, you can often find options that carry only about 5% to 10% time value, making them a more cost-effective choice in terms of decay.

He's tested this strategy extensively, starting from early 2007 until the book was written

When was the book written? The SPY has been above the 200 day SMA almost always since Sept 2010. It's been a very unusually long bull market. A strategy needs to be backtested for much longer than a few years. A few atypical years.

I wonder where he got the historical data for option prices. Far out LEAPS have low volume and do not trade very often, so even if you could get actual trade prices the last trade may have been days or weeks old. For a backtest you'd need to estimate a price based on the contemporaneous bid & ask. Which I doubt exists.

Just now, looking at the SPY Dec'26 495 call, a trade on 4/18/24 was $90.35. A trade on 4/19 was $84.06.

I agree with your concern about ATM leaps.

DITM options are leverage. ATM options are a lottery ticket.

Mark

The link below is an article that discusses how the 200d and 50d moving averages have lost their predictive power since 1993.

https://www.morningstar.com/news/marketwatch/20240...

From the article.

From 1928 through the end of 1992, according to my calculations, this moving-average strategy outperformed a buy-and-hold alternative by almost 5% on an annualized basis - 14.3% to 9.7%. That's a huge margin.

In contrast, from the beginning of 1993 through the end of this year's first quarter, the moving-average strategy lagged a buy-and-hold one by almost 3% on an annualized basis - 7.4% versus 10.3%. (See the chart below, which illustrates the number of false signals the moving average has given over the past 18 months.)

The most likely cause of this reversal of fortune, according to several finance professors who have studied technical analysis, is the creation of the first broad-market index fund ETF - the SPDR S&P 500 ETF SPY - in January 1993. A related factor was the advent of online discount brokers, which precipitated a long decline in brokerage commissions to today's near-zero rates. Both of these factors allowed investors to easily switch at little cost between stocks and cash with a single transaction.

Aussi

Following up on Lizdal's post with timing for the equal weight SP500, it doesn't look like using the 200 sma would be a winning strategy for LEAPS.

Since 19921231

Equal weight hold 63 days has a CAGR of 11.2% and SAWR of 8.01%. With timing being out below 200 SMA, CAGR 9.1% and surprising to me, SAWR of only 6.99%

From Lizdal's post

->-> SMAB uses the SMA slope change. To check if the S&P is below its MA200:
SP500EW_sell_if_SMAC
"Close all liquid positions and hold cash on any market dates where SMAC < 0"
[SMAC]: [[1-day SMA lag 0] - [200-day SMA lag 0]]
https://gtr1.net/2013/?~SP500EW_sell_if_SMAC:h63::...

Aussi

Thanks, Aussi. That is a great article. That is why this board is so excellent.

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