LEAPS Options Contracts + Leveraged ETFs (Step by Step)
LEAPS can be used as a stock replacement strategy. Get similar exposure as stocks but with less money. Here is how I am using LEAPS with leveraged ETFs.
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SCRIPT
Recent macro-economic and geo political news has created a lot of uncertainty. S&P is in correction while Nasdaq is flirting around a bear market. This has created opportunities
I this video I will talk about LEAPs options contracts, walk through an example, and share how I am using LEAPS with leveraged ETFs.
LEAPS or Long term equity anticipation securities are option contracts that expire in more than a year. In other word long dated contracts where expiration is more than a year out. Personally, anything over 9 months is LEAPS for me
Why would someone want to venture with LEAPS? There are number of reasons to do LEAPS. In this video, I want to focus on how you can use LEAPS as a ‘Stock Replacement’ strategy.
Remember our goal is stock replacement or get the same exposure as stocks via options but with less money. You want to consider - expiration date, delta and liquidity
Of course this is LEAPS so per the definition you want to open positions with expiration date out by at least a year. Personally, I am fine with an expiration date out by 9 or more months
The most important thing is delta. Delta is the amount of price change an option will see based on the price of the stock.
Final point, you only want to deal with liquid contracts or options with decent amount of open interest. The spread between bid and ask price should be narrow and within few cents or dollars depending on the stock
With LEAPS you have some time on your side. This allows you to wait for the option to work in your favor.
Limit order is a classic way to close a position. Have a percent gain in mind and put in a limit order in advance. For example, sell when gains hit 50%
Here is what I like to do especially with LEAPS. Typically, I will start a position at 80-85% delta. If the stock drops significantly and I am still bullish, I will add more contracts and bring down my average cost
I may decide to close early. Maybe I am at 2 months before expiration. Contract is in the money and delta is still around 80%.
And my gains have hit 40% as opposed to 50% target. In such a situation I may decided to close early, locks gains and move on to another position.
Given where we are with the market, I opened two positions in leveraged ETFs TQQQ and SOXL. Both expiring Jan 2023 and are at .80 delta.
I opened these 4 days back. Then we experienced the crazy drop when the tragic Ukraine news hit us on Thursday.
As planned I bought some more to reduce my overall cost. It worked out. I will buy more if it falls further
I am doing LEAPS because I don’t have cash to buy actual stocks. LEAPS with high delta give me similar exposure as stocks but with much less money
LEAPS are a good way to get similar exposure to stocks with less cash but it comes with an expiration date. You want to get contracts with 9 months or more to expiration, 80 plus delta, and high open interest.
Most us will close position within a year so this will be treated as short term gain from a tax perspective. Also, you don’t get dividends as you would with stocks
That’s all I have guys. Go get some LEAPS.
DISCLAIMER - I am not a Financial Adviser or Tax Professional, the information provided is my personal opinion and should not be considered professional advice.
#thinkfinance #leaps #leveragedetfs