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🔒 Premium Membership Positions - July 11, 2021

Hey Advanced Traders!


Now that we're in a bullish market, I want to review the difference between trading and investing LEAPS options and how you can cycle your LEAPS to compound your portfolio.


Since the topics we talk about today can be more complex, I encourage you to read this a couple of times and even take some notes.


Okay, here we go!


LEAPS Investing


When you invest in a LEAPS option with around a delta 0.80, you're main goal is to hold the option from one quarter to the next. Or you might hold it until the quarter after. For example, you could purchase a delta 0.80 LEAPS on AAPL and sell it towards the end of July or the end of October, which is when AAPL typically has their earnings releases. Or you can set a profit target to sell the LEAPS, perhaps when the option gains 10-50%. Yes, you read that right. I wrote 50%. This is a typical gain for a LEAPS option when we are in a bullish market and there is no negative news looming in the air. So for example, you could purchase a delta 0.80 LEAPS for around $5000 and sell it when it reaches around $7500.


Okay, this is where it gets interesting. Before you sell your LEAPS option, I want you to take a look at the delta of that option. Most likely, the delta would have increased from a 0.80 to 0.90! Yeah! The "speed" of the option increased as the underlying stock increased in price.


Once you sell the LEAPS and the company delivers a good quarterly report again, you can then consider buying another LEAPS option. But wait! Instead of buying that same LEAPS option that you just sold, you can now buy the new delta 0.80 LEAPS option. Why do that? It's because the new delta 0.80 LEAPS option is less expensive than the old delta 0.90 LEAPS that you just sold.


Okay. Let me summarize this. Basically what you are doing are the following steps:


  1. Buy a delta 0.80 LEAPS option for around $5000

  2. Wait for the underlying stock to increase in price

  3. Let the delta 0.80 LEAPS turn into a delta 0.90 LEAPS

  4. Sell the LEAPS option for around $7500

  5. Wait for the company to deliver a good quarterly report

  6. Go back to step 1 and buy a new delta 0.80 LEAPS option for around $5000


Essentially, you are cycling through your LEAPS option each quarter.


It's like leasing a delta 0.80 sports car for 3-6 months, and then giving it back to the car dealership for a higher price since you modified the car and made it faster. Then, you get the newer model of the delta 0.80 sports car and do the same thing over and over again.


LEAPS Trading


Okay, let's talk about trading LEAPS options now. Trading LEAPS options is similar to investing in LEAPS. The difference is that you are playing hot potato and selling your LEAPS option faster than your LEAPS for investing.


When we trade LEAPS options, we typically will buy LEAPS options with deltas around 0.50-0.70. Yes, these LEAPS are relatively more risky since they have less intrinsic value compared to a delta 0.80 LEAPS. However, delta 0.50-0.70 LEAPS convert to higher deltas faster. (This is due to the higher gamma, but I won't discuss this in this Membership Position since I don't want to confuse you.) This means that a delta 0.50 can turn into a delta 0.55 in as little as 1-2 weeks!


You'll notice that when you buy a delta 0.80 and a delta 0.50 LEAPS at the same time, the delta 0.50 LEAPS option will almost always grow faster in percentage than the delta 0.80 LEAPS. You'll also notice that the delta 0.50 LEAPS option is more volatile that the delta 0.80 LEAPS. Because of these reasons, we want to buy and sell the delta 0.50 LEAPS at a faster frequency.


Okay, so what are the steps for trading LEAPS and cycling through them? Here they are:

  1. Buy a delta 0.50 LEAPS option for around $2000

  2. Wait for the underlying stock to increase in price

  3. Let the delta 0.50 LEAPS turn into a delta 0.55 LEAPS

  4. Sell the LEAPS option for around $2500

  5. Go back to step 1 and buy a new delta 0.50 LEAPS option for around $2000

Compounding Your Portfolio


As you continue to make profit from your LEAPS options, what can you do now? That's right! You can buy more long-term holding shares. So every time you make around $500 or $2500, you can purchase 1-5 more shares of your favorite companies, making your portfolio grow faster over time.


Conclusion


Again, all of these numbers that I illustrated here are nicely rounded numbers, so I can help you understand the concept a little better. Also, you can feel free to tweak your profit targets. Instead of waiting until you get a 50% profit, why not just wait until it hits a 25% profit? Or maybe instead of waiting for your delta 0.50 to turn into a delta 0.55, why not just let it turn into a delta 0.52? If you want to start investing and trading LEAPS options and have the risk tolerance and portfolio size to do so, you can consider doing both at the same time to see how you feel. You can even do it in a paper trading account and observe how the numbers move over time.


I know all of this may be overwhelming for you. Don't worry. Just breathe! If you have any questions, my team and I are always here to help!


Be disciplined! Happy trading and investing! 😄


Steve and the Call to Leap Team


The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.

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