LEAPS
Long-term Equity Anticipation Securities (LEAPS)
I realized I’ve been slacking on my investment education, so decided to revisit the basics. No Iron Condors here, but I did find out what LEAPS are and how they can be used to turn on the money faucet. (Not to be confused with crypto faucets, which also can be activated to dispense money).
Now, writing OTM calls can already be a money faucet, and in fact that’s pretty much what we’re doing. Buying a LEAP lets you start with ~half of the actual cost of the underlying stock.
“But Rocky!” you say, visibly irritated, “Wtf is a LEAP?”.
An options contract that expires more than a year out. So if you buy an option expiring in 2023, that’s a LEAP. If you buy a contract 11 months out, that is not a LEAP.
That’s it. That’s literally all it is, is buying a Call with a far-out expiry.
Okay let’s say you want to sell calls on FakeStock, and FakeStock is trading at $10. You don’t have $1000, but you do have $350. Luckily, the $8 Strike expiring 2023 has a premium of only $3.49. So you just bought a LEAP. Now you can Sell a call, with the option you bought as collateral. Now you just write calls the same as you would if you owned the underlying stock.
For example, if you now own 1 call option for FakeStock at $8 for a $349 premium, and you write a call at $9 on a $.40 premium, you just got $40. And if you get exercised for some reason, you can then exercise your option at $8/share, and sell them at $9/share. You still lost $249. Maybe you’ll just want to sell the $11.50 strike for $.10.
As long as the Call you’re selling can cover the cost of the Call you will buy, plus the premium you already paid, then you can’t lose. What could possibly go wrong?
Well for one, according to a YouTube video, you may need Options level 3 or 4 approval. (They said 4 or 5, but idk what broker they’re using that has 5 levels. Maybe I’m just retarded). Point being you need to be able to write naked calls, since technically that’s what you’re doing. This may even require the use of a margin account. Fear not, Robinhood users, for you need no such silly things as Level 5 Approval or Margin.
Robinhood lets you buy a LEAP then sell a call against it. Now I’m not sure why, maybe it might have something to do with all Robinhood accounts technically being margin, idk. If WSB started spamming PMCC’s, that might change.
Oh right, you may have heard of the Poor Man’s Covered Call. That’s what this is. Buying a LEAP then writing a Call with a nearer expiry.
So it’s possible Robinhood would automatically exercise your LEAP if that would cover the debt from having your written call be exercised. Most brokers, to my very limited knowledge of 1 YouTube video that was on in the background, won’t do that. You’ll have to either manually exercise your LEAP, or buy 100 shares at market price to cover the sale. I imagine they will liquidate positions, if necessary. Just like having to come up with money for a margin trade that went sideways. Or you might just need to transfer funds to your account.
Now what if you get greedy and start writing calls a lot closer to the money? Well, you get more reward for the risk. And if you get exercised, I mean, we just pretty much went over that.
TLDR
Buy an ITM Call expiring >1y year out,
Write an OTM Call expiring 1 week/1 month out.
For SafeMode
Use a Strike that covers your LEAP’s strike+the premium (breakeven).
Calculating that fat profit, and gushing over how much bigger % you’re getting on your initial investment, just remember that if you get exercised, you will most likely end up paying the LEAP’s strike on top of the premium you already paid. One way or another, the other party is getting their 100 shares and they’re getting them from you.
You also don’t get dividends, but I feel like that is obvious.
