![]() This Strategy presented in this course involving buying a LEAPS options and selling a monthly options against it. This is a strategy that is most overlook by Options Trader. Investors may, however, limit the risk of selling a LEAP option by purchasing another option further out-of-the-money, creating a limited-risk credit spread.The Strategy will work today and in future Even then, losses may not be avoided and investors must be willing to assume the unlimited risks involved. Only investors with a solid understanding of options and the risks involved with selling options should attempt LEAP selling strategies. For investors that sell LEAP options, the risk is unlimited on the upside and only limited by zero on the downside (since a stock can go to zero). LEAPs may be less liquid than standard monthly or weekly options, however, so risk management could potentially become more challenging. ![]() ![]() ![]() Investors may also potentially choose to cut a position once the option reaches a certain amount of time until expiration. An investor could simply decide, for example, to cut their losses once the value of an option declines by a specified amount. LEAP options can be managed just like standard options with some caveats. Due to the amount of time premium that may be built into LEAPs, they may also be cost prohibitive. Options can also be affected by changes in implied volatility, potentially fueling gains or losses. if one is buying LEAP options, those options will lose value over time as the effects of theta, or time decay, take a toll with all other inputs remaining constant. LEAPs may also potentially allow for a better use of capital and higher ROI. If LEAPS are purchased, then the maximum risk of the position is limited to the premium paid. LEAPS may have numerous potential benefits. If an investor owns shares in company YYY, which pays a handsome dividend, then he or she may look to purchase long-term puts to hedge their downside risk. LEAPs may also be used to hedge a long or short position in a stock or index. In this way a high positive delta LEAP call is often used as a low capital required stock replacement strategy. A put option can be put on if one is bearish on a stock, but again thinks that their bearish thesis may take some time to unfold. LEAP options may be used to make long-term bets on a stock or index going up or down.Ī call option can be put on when one is bullish the stock, but thinks their bullish thesis will take some time to develop. If the share price were to climb to $85, for example, Bob could potentially see a profit of $25 per share.Īt that point, Bob could simply sell the option back to the market or he could exercise is options to obtain a long position in the stock at $55. If the stock rockets higher, however, Bob could potentially profit point-for-point once the share price rises above the break-even level of $60 per share. If the stock price is below the option strike price of $55 at expiration, Bob will lose the entire $5 premium paid. His potential upside is technically unlimited. Bob makes the decision to purchase a LEAP call option that expires in one year with a strike price of $55 per share for a premium of $5.00īobs risk is now limited to the $5 premium he paid for the call option. ![]() That, however, could tie up a great deal of Bobs investment capital for a significant period of time. Bobs understanding is that the products may take anywhere from 9-15 months to bring to market.īob could simply buy shares of ABC at $40 per share now and hope that the stock price does climb in the months ahead. Bob thinks the stock price could potentially go to $80 per share or even higher if the company is successful with the launch of its new products. For example, suppose that investor Bob is bullish on stock ABC which is currently trading at $40 per share.īob thinks the company has great fundamentals, and it is currently in the process of bringing several new products to market. LEAPS, on the other hand, may extend out for a couple years and always expire in the month of January.Īn investor may use LEAPS if they are bullish or bearish a stock or index, but think that there opinion may take some time to play out. Standard options are typically available in monthly cycles, and many are now also available in weekly cycles. These long-dated options are available on approximately 2500 securities and several indexes. The acronym LEAP stands for Long Term Equity Anticipation Security and like standard options, LEAPS come in two forms: calls and puts. A LEAP option is essentially an option with longer terms than standard options. ![]()
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