I don’t have a detailed analysis to back it up, but my guess is that CEFs are probably superior because call options don’t pay dividends so you’re not getting as much tax benefit as holding CEFs. It’s also somewhat tricky to obtain good pricing on options (the bid-ask spread tends to be much higher than on regular securities so you get a terrible deal if you just do market orders).
I pretty much never use market orders for options. With a little patience and a limit order, you can usually get the midpoint between bid and ask, or close to it. This would be especially important for LEAPS.
With a little patience and a limit order, you can usually get the midpoint between bid and ask, or close to it.
How do you do this when the market is moving constantly and so you’d have to constantly update your limit price to keep it at the midpoint? I’ve been doing this manually and unless the market is just not moving for some reason, I often end up chasing the market with my limit price, and then quickly get a fill (probably not that close to the midpoint although it’s hard to tell) when the market turns around and moves into my limit order.
Well, it’s obviously not going to be the midpoint when it fills because you can only buy at someone’s ask or sell at someone’s bid. But with a limit order, you can be the best bid or ask.
I don’t usually chase it. If you’re buying a call and the market drops, you get a fill. If it rallies, maybe you wait 15 minutes and adjust, or try again tomorrow. For LEAPS it wouldn’t be unreasonable to try for a few days.
The market is usually calmer in the middle of the trading day, maybe because the big players are eating lunch, although it can get chaotic again near the close.
Except for a very liquid underlying near the money, you’re almost always trading options with a market maker. The market maker will set the bid and ask based on his models. If he gets a fill, and can’t get enough of the opposite side, he’ll buy or sell shares of the underlying to neutralize his delta. He’s not making directional bets, just making money on the spreads. If you offer a trade near the midpoint, but even slightly in the market-maker’s favor, he’ll usually trade with you, when he gets around to it. This could easily take fifteen minutes. He also doesn’t like you narrowing the spread on him, because that means someone might trade with you directly and he doesn’t get his cut, so if he can handle your volume, he’ll just take your order off the book.
Another way to get leverage in an IRA is to buy long-dated call options (as recommended in Lifecycle Investing). Would you expect CEFs to be superior?
I don’t have a detailed analysis to back it up, but my guess is that CEFs are probably superior because call options don’t pay dividends so you’re not getting as much tax benefit as holding CEFs. It’s also somewhat tricky to obtain good pricing on options (the bid-ask spread tends to be much higher than on regular securities so you get a terrible deal if you just do market orders).
I pretty much never use market orders for options. With a little patience and a limit order, you can usually get the midpoint between bid and ask, or close to it. This would be especially important for LEAPS.
How do you do this when the market is moving constantly and so you’d have to constantly update your limit price to keep it at the midpoint? I’ve been doing this manually and unless the market is just not moving for some reason, I often end up chasing the market with my limit price, and then quickly get a fill (probably not that close to the midpoint although it’s hard to tell) when the market turns around and moves into my limit order.
Well, it’s obviously not going to be the midpoint when it fills because you can only buy at someone’s ask or sell at someone’s bid. But with a limit order, you can be the best bid or ask.
I don’t usually chase it. If you’re buying a call and the market drops, you get a fill. If it rallies, maybe you wait 15 minutes and adjust, or try again tomorrow. For LEAPS it wouldn’t be unreasonable to try for a few days.
The market is usually calmer in the middle of the trading day, maybe because the big players are eating lunch, although it can get chaotic again near the close.
Except for a very liquid underlying near the money, you’re almost always trading options with a market maker. The market maker will set the bid and ask based on his models. If he gets a fill, and can’t get enough of the opposite side, he’ll buy or sell shares of the underlying to neutralize his delta. He’s not making directional bets, just making money on the spreads. If you offer a trade near the midpoint, but even slightly in the market-maker’s favor, he’ll usually trade with you, when he gets around to it. This could easily take fifteen minutes. He also doesn’t like you narrowing the spread on him, because that means someone might trade with you directly and he doesn’t get his cut, so if he can handle your volume, he’ll just take your order off the book.