Good morning, traders…
Do you own stocks?
When it comes to “long-term investments,” the traditional wisdom tells you:
“Just buy and hold index funds!”
“Time in the market beats timing the market!”
“Pigs get fat, hogs get slaughtered!”
Yada yada, and so on…
But you’re an options trader. You have an entire universe of contracts at your disposal that most traders are completely oblivious to.
You can think outside the box…
And by doing so, amplify your returns exponentially…
I’m talking about a compelling options-trading alternative to buying stocks: LEAPS (Long-term Equity Anticipation Securities).
LEAPS are long-dated contracts expiring one year from now (or longer).
They offer bigger gains on successful directional bets compared to simply holding shares.
When you invest in a stock, your returns are directly tied to the full price of the shares you buy.
With LEAPS, you gain exposure to the same potential upside in the underlying stock, but you do so with significantly less up-front capital.
And that’s where the magic happens for your % returns.
Let Me Show You Why LEAPS Are So Powerful (And How You Can Start Weaponizing Them)…
Imagine you’re bullish on a stock, let’s call it TechCorp, currently trading at $100 per share.
Scenario 1: Holding Shares
- You buy 100 shares of TechCorp at $100/share.
- Total investment: $10,000
- One year later, TechCorp’s stock price has risen by 20% to $120/share.
- Your 100 shares are now worth $12,000
- Your gain: $2,000 (a 20% return on your initial $10,000 investment)
Scenario 2: Holding LEAP Options
- Instead of buying shares, you buy a 1-year call LEAP option with a $105. (You think the stock will go up, but don’t know how much.)
- Let’s assume this LEAP contract costs $8.00 ($800 up front).
- To approximate the exposure of 100 shares, you buy 1 LEAP contract.
- Total investment: $800 (significantly less capital tied up than the $10,000 of shares)
- One year later, TechCorp’s stock price still rises by 20% to $120/share.
- Your $105 strike call option is now deep ITM (in-the-money).
- The intrinsic value of your option is: Current Stock Price – Strike Price = $120 – $105 = $15.00 per share.
- At expiration, assuming the option is trading at its intrinsic value, your contract is worth: $15.00/share.
- Your gain: $700
- Your return on initial investment: 87.5%
Hypothetical Difference
- Holding Shares: $10,000 risk for $2,000 gain (20% return)
- Holding LEAP Options: $800 risk for $700 gain (87.5% return)
Even though the absolute dollar gain in this specific LEAP example is lower ($700 vs. $2,000), the % return on the capital you invested is vastly superior with the LEAP.
87.5% vs. 20%.
This is the power of leverage. You control the same amount of underlying stock (100 shares in this case) with a fraction of the capital.
This frees up the rest of your capital for other opportunities or simply reduces your overall capital at risk.
The Risks of LEAPs
- Risk: While LEAPs offer higher potential returns, they also carry higher risk. If TechCorp’s stock price falls or doesn’t move significantly, your LEAP option could expire worthless, resulting in a 100% loss of your invested capital for that specific trade. Shares, on the other hand, still retain some value even if they drop.
- Time Decay (Theta): LEAPs are subject to time decay, although at a much slower rate than short-term options. If you’re acclimated to trading short-term options, the time decay on LEAPS won’t feel intense. But the longer you hold them, the more time decay will erode their value, especially as they get closer to expiration.
- Volatility (Vega): The value of LEAPs is also influenced by implied volatility. An increase in implied volatility can boost the option’s value, while a decrease can hurt it. But if the stock is rising and gaining buyers, the IV is far more likely to rise than drop.
- Delta: The “slightly OTM” aspect is key. A slightly OTM LEAP will have a delta less than 1 (e.g., 0.60 or 0.70), meaning it won’t move dollar-for-dollar with the underlying stock initially. As the stock moves in the money, the delta will approach 1.
The takeaway is clear: If you consistently find yourself holding stocks for around a year or less, and you’re comfortable with a higher risk/reward profile, LEAP call options can be a killer tool in your arsenal.
You can enjoy bigger % gains with less up-front investment.
Happy trading,
Ben Sturgill
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*Past performance does not indicate future results
