Boglehead + Casinohead strategy

Theres no denying that you generally see two pretty big “parties” of the online social media investing strategies. You got the bogleheads, buyin up ETFs, occasionally getting a little spicy and going for something like a small cap ETF or energy ETF, and then youve got the college kids, W5B, buying the cheapest +400% OTM calls cuz its what they can afford, or going all in to a single stock, and of course, lapping up on the daily and deleting their casino apps to avoid the red.

One may notice this appears to be the opposite of a bell curve, if you were to plot (x-axis) a risk-level of each investor, or investment style, that you encountered online, you'll likely agree youll find two bumps – bogleheads and gamblers. Isnt that quite peculiar? Wheres the middle?

I suspect its because of:

1. Similar reason to USA having two political parties, social media is based on gaining traction, following, and likes. In a competitive environment, it is easier to be a little more extreme to rally support, than a more “boring” middleman, regardless if being less extreme in the strategy is in fact a better approach.

2. I forgot what #2 was while writing point one. If youre reading this, i couldnt remember it either.

So anyways, I'm here to pitch an idea, that lies in a strange hybrid, and see what people think. Options + ETFs. (ITM LEAPs)

Ok, not that novel. Thats sorta the point. But i feel like ive never seen a boglehead even consider an option, and its rare to find a W5B buying ITM, or LEAPs, certainly not both.

But it seems… Surprisingly desirable, when I think about it. Its very similar to trading on leverage, with one very very significant difference: you pay the leverage fee once. And, rather noteworthy, the further out the option is, the SMALLER the theta decay. Acquiring margin uses a flat rate % interest per unit of time, I believe (never done margin, so I'm guessing), so for longer term investments its a pretty bad idea.

Okay. Why?

Let's look at VTI. $218. And strike date of January, 2024. You can buy calls for VTI with a strike price of about half its current value, $110. At this price, each contract costs ~$109, for a break-even of $219. interesting…

Now, if the boglehead theory is true, that in the long run, VTI goes up, then this becomes a rather alluring idea. Timing is of course, a big deal, but theres no reason you cant buy this same contract every month or so, aiming for 1-2 years into the future, and just keep the cycle going. Yes, there is risk still, but quite frankly, when isnt there? I think the upside outweighs the risk from an almost mathematical perspective.

First off, lets talk downsides. Theres mainly two

1. Your investment loses value every single day. Theta decay. This is true, but this deep ITM, its… What, $0.50 per year per share? Added to the missed dividend per year, minus the expense ratio per year, works out to something like $2.25 lost value per share per year, or about 1%. I think that alone is enough to turn bogleheads away, the idea of losing 1% of the entire investment every year

2. Magnified losses. Yes: because each contract cost you $109, you were able to afford TWICE as many as if you got just VTI. This means for every dollar that VTI falls, you lose $2.

But… VTI goes up? I think the fear, more realistically stated, is that if VTI were to suddenly fall 50% – then your option effectively lost all its value, didnt it? Ah, no, this isnt margin my friends. For something like that to happen, volatility must be sky high. So therefore, is IV. So therefore, your option actually has more value than youd think. Besides, youve got two years to recover to origunal, and even if you dont, you havent “lost everything,” although it is a more severe loss to take. And youve been buying these options time-averaged, so, the option that was going to expire soon after the 50% fall, isnt worthless, because two years ago, what was VTI at?

My belief is that its really quite hard to lose a cripplingly significant amount of your investment (>30%, which is pathetic to those at W5B), based on analysis of VTI's performance so far. While it could very rarely happen to a couple of options that had unfortunate timing, the vast majority should see upside, which I now get into.

For every $1 that VTI increases, your gains increase by $2.

Thats quite the upside isnt it? Hard to imagine that it fails to overcome the extra losses some calls will incur.

Theres… One more thing. When you hear options, almost NOBODY pairs that with “long term capital gains”. And, the difference in taxes is nothing to dismiss. But, if your option expires >1 year out, and you dont sell/exercise it in that time, then… I'm not a tax expert, but congratulations you just qualified for long term capital gains.

So, why arent deep ITM ETF LEAPs more common? I rarely see anyone suggest em, and I only trade strategies I see recommended to me on reddit.

TL;DR – ITM ETF LEAPs are a rare sight on reddit, but I suspect there is massive potential in them. Whats the catch?

Edit – had to make adjustments to get past the bot.