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LEAPS stands for Long
Term Equity Anticipation Securities.
This is another variation version of the Bull Call Debit Spread.
In LEAPS strategy, we buy to open our long call position 1 year or longer
in the future and sell to open our short call position in the current
month. The idea of LEAPS is to generate monthly income without owning
stock. This is a covered call related strategy. We should master our
covered call strategy before trying LEAPS.
Some traders consider using LEAPS as a stock substitute strategy to
sell “covered call”. There is risk involved in this strategy. When we own
stock and sell covered call against it, we are in good shape if the stock
goes side way. However, with LEAPS, if the stock goes side way, LEAPS
still lose value due to time decay. In case the stock falls sharply,
LEAPS will lose money quickly due to “double jeopardy” factors since it
loses money because of the stock losing value and also because of time
decay. In LEAPS strategy, we should never
let our front month short call position “buried” too deep in the money if
the stock moves up too fast. If that happens, we should buy back our
front month short call and sell another short call in the following
month. Strike price selection and chart reading skills are needed to do
this task. In general, this is a tricky strategy and it is not
recommended for beginners.
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