I have been re-thinking my target premium again, in an effort to stay as conservative as possible, in case I decide to really scale up my allocation to #fuzzyleaps in the future. I just wanted to post my latest thinking, in order to let you guys chime in with criticisms, suggestions, etc.

I think that we can divide the premium we need to bring in, into 2 categories. One, we need to cover the cost of the LEAPs, and two, we would like to make some kind of profit on the cash allocated when all is said and done. With that in mind, let’s start with the LEAPs.

LEAPs Target:
At a bare minimum, it seems to me that we at least need to pay off our LEAPs by expiration (so 4 years in the future). Of course, the LEAPs won’t really be worth zero in 4 years, but assuming that they will be, establishes a conservative target threshold. Since I allocate enough money to cover several rollups over time, let’s call that $100,000 per LEAP that must be paid for over the 4-year period. Drilling that down to establish a minimum annual target leaves us with:

$100,000 / 4 = $25,000 premium needed per LEAP per year.

But, as I said, we also would like to make some kind of profit over the 4 years. The question is, what minimum number is reasonable? Here is my thinking on that.

Profit Target:
In order to participate in gains in SPX, one could simple buy and hold SPY. Long term, history says that doing that would result in an average (including dividends) of around 10% per year. Of course, the future can and will be different, but a 100-year track record is hard to argue with. So, if we want to try to beat that somehow using the SPX options market, what is a reasonable target to shoot for?

While I am tempted to try for some way higher number, such as 50%, what I am trying to establish here is a minimum, and therefore conservative, goal. For me, I think that doubling the buy-and-hold average is enough to make it worth the effort, but not so much that it’s too optimistic. So, let’s try using a 20% annual return target and see where that gets us.

$100,000 X 0.2 = $20,000 premium needed per LEAP per year.

So the total now is:

$25,000 + $20,000 = $45,000 needed per LEAP per year.

Divided by 250 trading days per year:

$45,000 / 250 = $180 needed per LEAP per day.

Multiplied by my current 3 LEAPs:

$180 X 3 = $540 total premium needed per day to achieve the stated goal.

So, if we are trying to establish a minimum threshold premium per day, this seems to me to be a reasonable target. Not so conservative as to make it not worth doing, but profitable enough to serve as a minimum goal. What do you guys think? Thanks in advance for any input!