Leaps Options Strategies: 2 Ways to Profit in A Bullish Market (Video)

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Have you heard about LEAPS options trading strategies and wonder what they are, and how they work?  Or maybe you found this after reading an article, watching a video about leaps options, or trading in general and wanted something more – maybe something that made more sense to you.

Even in July 2022, buying and selling leaps options is a strategy largely used by hedge funds and institutional investors. Why? Because they know better. Institutional investors know that leaps options offer a way to benefit from time.

In this article, I’m going to go over 2 leaps options trading strategies: buying deep in the money leaps calls, and selling deep out of the money leaps puts. And I’m going to do my best to explain it in a way that’s as easy as possible.  In a way that even my grandmother could understand. Well, that’s the plan.

I’m also going to show you how to scan for leaps options opportunities using a powerful options scanning tool you’ve probably never heard of.

What are leaps options?

LEAPS options stand for Long Term Equity AnticiPation Securities.  And what makes a leaps option an option?  A leaps option is a call or a put option with an expiration date far in the future.  Some say a minimum of 9 months and more, others say more than 1 year.   Either way, leaps options expire far in the future.  And some leaps options expire as far as 3 years out. However, trading strategies for leaps options vary considerably when we’re talking about an expiration date so far in the future.   For example, with the SPY (the S&P 500 Index ETF), there are leaps options that expire more than 3 years out.

Now, you might be wondering, why would I want to buy, or sell a leaps option, so far in the future?  Why not sell one that expires this week or next month?  The further out you buy a call, or sell a put, the higher the chance you’ll profit.  And the key to a profitable leaps trading options strategy is to tilt the chances in your favor.

SPY – An Investors Favorite

Now for the purposes of this article, I’ll refer to the SPY – or the S&P 500 ETF. But, there’s nothing stopping investors like you, from considering other companies, like Apple, Google, Tesla, or any other quality company that you’d like to own. And also, I’ll assume you’re looking to take a bullish stance on your investing strategy.  In other words, you expect the underlying stock or equity to go up. If you think stocks are going down, stop reading right now, as it’s not for you.

Now,  investors can buy and sell leaps options on virtually any stock, ETF, commodity, or even index.  And, the best investors will say, if you’re going to buy or sell options, do so on only the best stocks. The ones you’d be happy to own. Not on something you heard of in a Reddit group, or some strange yolo feed that talks about stonks and tendies.  Not that it’s all bad… it’s just far too risky – like the casino.  And for me, when it comes to investing, I’d rather have the odds in my favor.  And, the right leaps options offer me the best chances to profit.

Types of LEAPS options and strategies

There are two types of options: call options and put options. Investors can buy and sell calls and puts, and they do, daily.  Call options give the buyer the right, but not the obligation, to buy 100 shares of the underlying security, times the number of contracts, at a set price, at any time up until expiration.

Buying Leaps Call Options

For example, let’s consider the SPY ETF.  It’s probably the most common ETF that tracks the S&P 500.  If, as part of an investors leaps options trading strategy,  they bought one SPY call with a $400 strike price that expires on December 9, they could exercise the option at any time up until December 9 and buy 100 shares of SPY for $400 a piece.  The nice thing about it is that exercising is optional. Because, In this trade, the investor would have $50 of intrinsic value, and if there’s still time before expiration, they could just sell the option, and make even more.

Selling Leaps Naked Put Options

Now, you might also be wondering about selling leaps put options.  Selling out of the money put options is another bullish strategy, and it’s an amazing way for investors to generate income because the risk is essentially the same as owning a stock.  Put options offer buyers the right, but not the obligation to sell 100 shares of the underlying stock, times the number of contracts, at any point until expiration to the contract holder, or you the put seller.  In other words, the person holding the put option could make the seller buy 100 shares of the underlying stock or equity, times the number of contracts, at the strike price, at any time before expiration.

Leaps Naked Put Option Example

Taking the same example from before, let’s say an investor sold an “out of the money” SPY leaps put option with a $300 strike, with a December 9 expiration. And for that, they collected $21 in option premium.  And on expiration, SPY is trading below the strike at $290, well, the investor can expect to be put 100 of SPY for $300 a piece, even though they are only worth $290.

In this case, the P&L would look like this:  $21-$300+$290=$11 profit.  And to get the total, multiply $11 by 100 shares to get a final profit amount of $1100.  Not bad. Now, if the underlying security moves further below the strike, and it becomes “in the money”, well, the investor can always roll the option to a lower strike, and further out.  Traders roll options by issuing a “buy to close” close order on their put option, and then sell another with a lower strike price. The premium collected from the new option may cover, or at least partially cover the cost of purchasing the option back from the market.

Why Do Investors Buy Leaps Put Options

Now, you might wonder why people buy leaps put options. The reason traders buy leaps put options is to protect themselves against potential losses. But, since stock markets usually go up, you can use this to your advantage. In fact, traders will make the most money with this leaps strategy if they sell put options when volatility is high, as it was back in March and April of 2020.

Benefits of Buying Leaps Call Options

When it comes to leaps call options, investors typically gravitate toward deep in the money Leaps call options.  This way, they get the ability to control 100 shares of the underlying security, per contract, for a lot less money than owning the underlying stocks, or equity outright.  What boggles my mind is that in many cases, deep in the money leaps call options, like those with an 80 or 90 delta will cost about half as much, or less, than owning the stock outright- with very little extrinsic cost.

One thing that’s amazing about this strategy – buying deep in the money leaps call options is that the investors’ downside is limited to what they paid for the option.  In other words, you can’t lose more than what you paid for the option. 

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