1st December 2024

LEAPS (Long-Term Equity Anticipation Securities) are a versatile tool in the options trading world. They are long-dated options that provide investors with the ability to speculate on the long-term movement of a stock. Lets delve into what LEAPS are, how they work, and why they are an essential component of PMCC strategies.

LEAPS are options contracts with expiration dates typically ranging from one to three years from the issue date. Like all options, they give the holder the right, but not the obligation, to buy or sell the underlying asset at a specified strike price before the expiration date. LEAPS are available as both calls (for bullish positions) and puts (for bearish positions).

Key Features of LEAPS:

• Long Expiration Period: Most options expire within weeks or months, but LEAPS extend that timeline, making them ideal for longer-term strategies.
• Liquidity: LEAPS on popular stocks and indices often have good liquidity, though this can vary.
• High Delta: LEAPS, especially those that are deep in-the-money, tend to have a delta closer to 1, meaning their price movements closely track the underlying asset.

LEAPS in Poor Man’s Covered Calls (PMCC)

The PMCC is a cost-effective alternative to the traditional covered call strategy. Instead of owning 100 shares of the stock, which can be capital-intensive, the PMCC substitutes a LEAPS call option as the long-term "ownership" position.

How the PMCC Works:

• Buy a LEAPS Call: Select a deep-in-the-money LEAPS call option with a high delta. This serves as a stand-in for owning the stock.
• Sell Shorter-Term Calls: Regularly sell shorter-term call options (often referred to as “weekly” or “monthly” calls) against the LEAPS position to generate income.

This significantly reduces your capital required, but still allowing you to profit from time decay and price movements in the underlying stock.

Why LEAPS Are Essential for PMCC

• Cost Efficiency: Purchasing LEAPS requires less capital than buying 100 shares of stock. This allows smaller accounts to engage in covered call strategies without tying up substantial funds.
• High Leverage with Lower Risk: Because LEAPS have high deltas, they mimic the price movements of the underlying stock while limiting downside risk to the premium paid.
• Flexibility: LEAPS provide exposure to the underlying stock for an extended period, giving you the flexibility to implement various strategies around them, such as rolling positions or adjusting strike prices.
• Time to Recover: The long expiration horizon of LEAPS offers more time to recover from temporary setbacks in the stock price, which is particularly beneficial in volatile markets.