Does anyone have any experience/s using LEAPS?

Conerning rolling over options, I’d seen some interesting discussions about long-term equity anticipation securities (LEAPS), especially if they are rolled over. The idea is, broadly, over the long term the market is rising, so you could buy LEAPS on a security and roll them over. I’ve linked a video, the guy is a JP Morgan trader (he says) and he explains rolling over LEAPS.

Has anyone had any experience with this type of strategy. He is saying by rolling over, he turns a losing strategy into a winning one. Yeah, LEAPS are expensive.

Thoughts and ideas welcome!

I know this guy. Hmm, LEAPS is like holding a stock if you’re long.
The advantage of it is that you use relative little money to hold a big position. Theta doesn’t work against you as much. If you wanna buy, buy a ITM or ATM LEAPS. The risk is that you might lose the whole premium after one year if it’s not ITM. So, it comes down to personal preference and situation.

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LEAPS makes sense if you have high conviction about a stock, but don’t have the funds, yet you don’t want to use leverage. Let’s say you think TSLA will go 3x within the next 2 years. You buy a call option near the money for 100 shares for $30’000. That means, if TSLA price will be at least $300 above your strike price when you execute your contract, you have made money. The downside is limited to these $30’000 if you simple choose not to exercise the option.

Yeah the idea being that if you choose not to exercise (and this is most likely), even if the stock rises, the idea being that you hold this position rolling over, even several years…kind of like a savings scheme. I did see a yt video about this, some old guy explaining this idea…he was holding certain stocks, 5 years plus, rolling over when the contracts were close to expiry. And generally, a stock (well chosen) over 5 years, goes up,hey it’s a bull market the the FED is printing.

The Fed is not printing anymore or will soon stop printing.

Means I lose the premium.

I watched the video, but contrary to the fact that LEAPs is mentioned in the title, he’s talking about rolling over short-term options only. Unless I miss something or it was the wrong video. He mainly explains that he’s selling covered calls which he is rolling over to the next week if the option is ITM.

LEAPs can work, if the stock you selected is going up long-term. Could be possible for meme-stocks like Tesla, but nobody knows. You definitely need to choose your stock carefully. Which is stock-picking in the end.

Also, look at the bigger macro economic picture. Stock markets have been going up only after 2009 (with some short bumps along the ride - I include the Corora-crash as well here). What we’ve seen after March 2020 is a huge hike in money flowing into the markets.

If we have a longer multi-year drawdown, your LEAPs strategy won’t work. I think a lot of investors haven’t seen a multi-year drawdown. I remember both the dot-com bubble and also the financial crisis 2007-2009 (even though I wasn’t invested). Look at yourself how you reacted during the March 2020 Corona crash. Which emotions came up? Did you just keep buying? We have to remember that the March 2020 crash was some sort of flash crash, immediately being corrected by money printing.

Just remember that like everything, LEAPs have a price and they aren’t cheap. You are paying a premium for:

  1. Insurance - there is a max you can lose depending on the option premium
  2. Leverage - a market maker will have to pay to borrow funds to hedge your position

These are particularly expensive for LEAPs vs short term options as the time duration (thus theoretical option paths and borrow duration) are more.

You will also pay a higher premium for more volatile stocks.

For example, you could buy a TSLA LEAP today expiring Jan 19th 2024 (1.9 years time).

  • TSLA is trading at $800
  • The $1000 call will cost you about $200 in premium

So at expiry

  • If TSLA is worth less than $1000 you lost $200
  • If TSLA is worth $1200 you only broke even
  • For every +$1 over $1200 you profit $1

You need to decide whether the market is pricing this LEAP too cheaply or not. Do you think it should be worth more than $200? Then consider buying it. If not, then don’t.

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Something which shouldn’t be forgotten (I assume that most people will know, but just to clarify): you pay $20’000 for 1 call option ($200 x 100 shares). Which is an substantial amount for a lot of people.

There’s another angle to this one. Stocks like TSLA, which are highly volatile, can go up or down significantly in those 1.9 years. Back in Nov 2021, TSLA reached $1200 per share.

If price is going from $800 back to $1000 in the next weeks or months, the value of your option also increases. So you might be able to sell your $1000 option for 250$, cashing in a nice 5k profit.
But you could also buy the top, and then stocks go downhill for the next 2 years. Yes, you might be able to roll over, but you have to be really convinced that the stock you chose will go up in the next 5 or 10 years.

I’d seen another video, elsewhere…to clarify that narrator (sorry, it was a long time ago and I can’t find it) suggested to use the strategy ONLY on low volatile stocks, and using an American Option, so at least you have some control over the exercise of the expiry date. And yes, it works only in rising markets. So if you have a low volatility stock, hopefully there shouldn’t be large drawdowns. And yes LEAPS are options rolled over, close to expiry.

Although the abovementioned yt, he discusses selling covered calls, I would have no interest in covered calls, I am more interested in the options, LEAPS, rolling them over, kind of like a savings plan mechanism, for the long term (instead of investing in stocks for the long term), if you understand what I’m saying.

However, there may be a flaw in my logic, bc yes we are in a long term bull market and it works well in that type of market, if we go intro a protracted downturn, you’d lose the premium. Hence the logic insofar as buying options only on a low volatile stock (and they should be cheaper, due to this).

I guess first you need to decide what is your actual strategy. At the moment, I still don’t understand what you are trying to do.

  • Do you want to buy LEAPS CALL options or do you want to SELL PUT options?
  • If you want to buy a CALL option, you have to pay a premium. As @hippo noted, the underlying stock would have to appreciate a lot in price. Take the TSLA example: the price would have to appreciate by 50% for you to just break even, while you have to pay 20k in premium.
  • You said the options are rolled over: how do you want to make money by using the CALL option strategy when rolling over?
  • You also mention a savings plan mechanism: from my point of view, this would only work with selling LEAP PUT options. Can you elaborate on your train of thought?

Let’s take a low volatile stock: KO. Closed yesterday at 62.85$ (52W range 49.40 - 62.90).
Let’s use the 62.50$ and 65$ CALL options for Jan 19th 2024:

You will pay 700$ / 585$ to buy one CALL option. The stock price has to rise to 69.85$ / 68.70$ for you to just break even. That’s 11.14% / 9.3% in terms of percentage.
If you look at the 5Y chart, between Mar 2017 and Mar 2019 (42.44$ → 46.86$). It reached it’s previous peak on 01.01.2020 at 58.20$.

If I look at those numbers (and this is only a really quick superficial view), I’m not really convinced that KO will reach the stock prices I mentioned before in the next 1.9 years. Again, those prices would just let you break even.

For the rolling over part, I still don’t understand how you want to implement it with buying CALL options. Unless you sell them during the 1.9 years, once they appreciated in price.

I started buying long dated calls on SPY in 2020 crash whilst also selling puts to part finance it (very bullish strategy). I stopped as I don’t want to have any risk of being classified as a professional investor

My situation is that I could RE in next couple of years. If you are earlier in your wealth accumulation journey this is probably of lesser concern

I’m wondering how likely one would be marked as a pro trader. Once a pro trader, always a pro trader or does tax authority evaluate your situation every year?

what’s that mean? Retirement?

RE = Retire Early
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In the first instance, buy long out of the money CALL options, (and if not exercised-which is highly likely), rolled over. And looking at total holding period for the LEAPS….5+ years, but closer in fact, to 10 years. And yes, one can offset the high cost of the option/s by writing puts.

On another variation to the strategy, does anyone use or know of this technique- Automated Investing + LEAPS.

Admittedly, I think this guy jjjinvesting charges a little bit for his services (but not much), but I’m not throwing out the baby with the bathwater, judging by the very few yt views, I think there may be something in this….long term again. Admittedly, I am not familiar with this method, but it strikes me that its the same thing, with volatile stocks, this time (after doing a bit of research - Automatic Investment Management by Robert Lichello).

Interested in your thoughts!

Here you can get the old ebook for free:

I still don’t know if I understand your strategy correctly. What you are describing, is a “poor man’s covered call”. You want to write puts for a stock, which you don’t own directly, but you own LEAPS instead. Bringing your initial investment cost down.

So you first have to buy a LEAP, which will cost you money. If you write puts, you will receive some premium. My questions are:

  • what happens if the stock dumps and you get assigned for your put?
  • what’s the purpose of the OTM CALL LEAPS in this scenario?

The way I understand it is: you buy an ITM CALL LEAP, and then write CALLs instead. ITM, because delta is close to 1.0, which means that you have some collateral which you can use. If the stock appreciates in price, so does your ITM LEAP. See investopedia for more details.

Maybe you are crystal-clear on how your setup works, but for now I don’t understand it.

I watched the video. First impression: the guy looks like a professional and successful trader. NOT!
To clarify: I’m not easily blinded by looks (e.g. all the YT ads with young guys in suits talking about trading, options, how easy it is to make money), but it’s hard to take someone seriously who shoots a video in a shithole.

Other things I noticed:

  • he mentions that his portfolio has outperformed DJIA (or SPY) over the years. The problem is, that he doesn’t include dividend payments in his calculation. From 1993 until 2018 is 25 years of dividend payments missing. With LEAPS, you don’t receive dividends.
  • he mentions the AIM method and talks about having 50% and 50% cash almost all the time. I checked your other link, and the graphic about buying low and selling high is raising some red flags for me.

I’m not disregarding the idea completely, but I’m sceptical. If the approach was so superior, then why did the JJJ guy only make 150k from 1993 until 2018?

Ok, I had a read of this. Thanks. I suppose you could call it a poor mans covered call. So instead of owning the share, the LEAPS acts as a surrogate for the underlying. And buying far out of the money options (OTM), essentially buying time. If you choose to help defray the cost with any puts, they would need to have very little intrinsic value…very little time remaining, to reduce possibility of being called away. And true, I would not get dividends. Not really interested in them.
I think part of the research is to find a company…”you think this company’s going to do great”
Rolling the options forward is essential, check this out from 4min onwards, I think this summarises the ideas well. LEAP Options: The Best Investment Strategy I’ve Ever Seen - YouTube

Are you sure you understood the article from investopedia? It specifically says to buy a “deep-in-the-money LEAP call option” to implement the poor man’s covered call strategy. You want to have a delta as close to 1 as possible, which is not the case for OTM options.

I mentioned the dividends related to the JJJ guy and his portfolio, not in relation to LEAPS strategy in general.

The video you linked is talking about SPY, and they are not selling PUTs. They use LEAPS (at least 1y, better 2y) to participate from the increase in stock market over a this timeframe. They mention that the S&P500 hasn’t had 2 lost years in a row. The strategy from the video is for the LEAP option to increase in price due to the underlying also increasing.

The video you linked is about LEAPS for S&P 500, but now you are talking about “finding a company that’s doing great”. That’s the part about forecasting the future for a single stock, which is pretty hard.

Please don’t take this as an offense, but I’m not sure if you are really clear about your strategy with LEAPS. So far, I didn’t see a clear strategy yet. You decide what’s best for you, but derivatives are a topic which should be understood very well before investing money in it.