The LEAPS Option Strategy to Buy Stocks At Half-Price (Or Less)

Did you know that by using the right LEAPS Option Strategy you can double your returns yet your risk by half?

By using the LEAPS options, you’re able to buy all your favorite stocks at half-price or less!

And with LEAPS, not only can you magnify your returns…

You can also lower your risk by half or more!

But that is only IF you use it the right way.

If you use it the wrong way, you can very easily lose all the capital you invested into the LEAPS Options.

So if you want to learn how to use LEAPS options the right way to increase your returns and lower your risk…

Then you want to pay attention to this article because I will share with you everything you need to know about LEAPS options here.

Let’s get started.

What exactly are LEAPS Options?

LEAPS is an acronym and it stands for Long-term Equity Anticipation Securities.

This type of Option is no different from any other Option when you open up the Options Chain in your brokerage software.

There will not be a label that tells you “LEAPS” in the Options Chain.

The main difference is that the days-to-expiration (DTE) is longer than a year.

That means when you open up the Options Chain, any Options that are longer than 365 days are considered LEAPS.

Now, there are two types of LEAPS Options.

There are the LEAPS Call Options, and there are the LEAPS Put Options.

LEAPS Call Options are generally used as a stock replacement strategy.

You can even sell Covered Calls on it.

This is what’s known as the Poor Man’s Covered Call in the Options world.

Now, for LEAPS Call Options, it’s better to buy them only on non-dividend stocks because you do not get dividends with Options.

If you own a stock that pays dividends, on the ex-dividend date, theoretically, the stock will drop by the same amount as the dividends being paid out.

So if the stock is paying a $0.50 dividend, then theoretically, the stock will drop by $0.50 on the ex-dividend date.

This way you neither win nor lose because the loss in the stock is compensated by the dividend you receive.

However, if you bought a LEAPS Call Option, the drop in the stock price will result in a drop in the Option’s price.

And since you do not receive any dividends to compensate for the drop in your LEAPS Call Option’s value, it will be an outright loss for you.

That is why it’s best to only buy the LEAPS Call Option on stocks that do not pay dividends, or at the very least, pay very little dividends.

As for the LEAPS Put Options, they are generally used as long-term protection for your portfolio in case the market crashes.

So if you’re thinking of hedging your portfolio, then you can consider buying LEAPS Put Options as a way to protect your portfolio on the downside.

For our purpose, we will only be focusing on the LEAPS Call Options as a stock replacement strategy.

What Are The Benefits of LEAPS vs. Stocks?

So you might be wondering, why buy LEAPS Call Options instead of just buying stocks?

Benefit #1: You get to have your favorite stocks at half-price or less

First of all, by buying a LEAPS Call Option, you get to control 100 shares of the underlying stock at half-price or less.

If you take a look at the Options Chain above, you will see that these are all the LEAPS Call Options with a days-t0-expiration (DTE) of 577 days.

That means there are 577 days left till the expiration of the Option.

If you take a look at the LEAPS Call Option with the 60 strike price (highlighted in the green box), you will notice that you can buy it for $54.15 at the Ask price.

Since each Option consists of 100 shares, the total capital needed to buy this Option is $5,415.

And since the current stock price is $108.68, to buy 100 shares of the stock would cost you $10,868.

So by buying the LEAPS Call Option, you paid less than half-price compared to buying 100 shares.

And you still get to control the potential gains on the full 100 shares of the stock!

Also, if you noticed, the delta on this LEAPS Call Option is 0.88.

What that means is that for every $1 move in the underlying stock, your Option gains $0.88 in value.

That equates to $88 in profit for every $1 move in the underlying stock (above your purchase price).

And as the stock goes up, the delta of the Option goes up as well to a maximum of 1.00 delta.

That means that as the stock price increases, the value of the LEAPS Call Option increases even more (more on this below).

Now, if you chose to buy the LEAPS Call Option with the strike price of 105, it would only cost you $23.05.

That means you’d have to put up a capital of $2,305 to buy it.

That is a fraction of what you’d pay if you bought 100 shares of the stock.

So if for some reason the stock goes to $0, you’d only lose $2,305.

But if you had bought 100 shares of the stock, you’d lose almost 5 times that amount, which is $10,868.

Now, while it might be tempting to buy the cheaper LEAPS Call Options, I want to caution you on that.

That is because the cheaper LEAPS Call Options are largely just Extrinsic Value.

And if you are buying Options, you want to buy as little Extrinsic Value as possible (this is the opposite of selling Options where you want to sell as much Extrinsic Value as possible).

That’s because all Extrinsic Value goes to zero when the Option expires.

So if you had bought the LEAPS Call Option with the strike price of 105 (with an Extrinsic Value of $18.92), and on expiration day the stock closed at exactly the same price as when you bought the Option…

Then you would have lost $18.92 in Extrinsic Value.

That means a loss of $1,892.

But if you compare that to the LEAPS Call Option with the strike price of 60 (with an Extrinsic Value of $4.87), then if the stock closed at the same price as well…

You’d only lose $4.87, which is a loss of $487.

That is why it’s better to buy the Deep-In-The-Money (DITM) LEAPS Call Options as opposed to the At-The-Money (ATM) or the Out-Of-The-Money (OTM) Options.

Benefit #2: Reduce your risk by half or more

Because you pay less for the LEAPS Call Options, you reduce your risk significantly as compared to buying 100 shares of the stock.

For example, if you bought 100 shares of a stock that is worth $100 and it goes to $0…

Then your loss would be $10,000.

But if you bought the LEAPS Call Option for $50 and the underlying stock goes to $0…

Then your loss would only be $5,000.

Benefit #3: Make more as the stock goes up, and lose less as the stock goes down

The good thing about LEAPS Call Options is that if the stock goes up, you get a geometric increase in your profit.

And on the flip side, as the stock goes down, you get a geometric decrease in your loss.

That’s because of the dynamic delta.

Delta measures the change in the Option’s value per dollar move in the underlying stock.

For example, let’s say you bought a LEAPS Call Option with a 0.80 delta at the price of $10.00.

If the underlying stock goes up $1, the price of your Option would increase to $10.80.

And if the underlying stock goes down $1, the price of your Option would decrease to $9.20.

Now, as the stock continues to go up, the delta will increase as well.

It will go from 0.80 to 0.81, then to 0.82, and eventually cap at 1.00.

That means that your Option value will increase even more per dollar move up in the underlying stock!

Similarly, as the stock goes down, the delta will decrease as well.

It will drop from 0.80 to 0.79, then to 0.78, and eventually become 0.

That means as the stock goes down, your Option’s value will lose lesser per dollar move down in the underlying stock.

Benefit #4: Better risk-to-reward ratio

With the LEAPS Call Options, you will get a better risk-to-reward ratio because of the leverage you get.

For example, if you bought a stock at $100 and it doubles to $200, then your risk-to-reward ratio is 1:1.

That is because your capital is $100 and your profit is $100.

If you bought a LEAPS Call Option, you could buy it for half the price of the underlying stock’s price at $50.

And if the underlying stock goes to $200, with a delta of 0.80 on the LEAPS Call Option, your profit would roughly be 80% – 100% of the $100 capital gain.

So if the delta is 0.90 when the stock reaches $200, then that roughly would be $90 in profit.

In this case, your risk-to-reward would be 1:1.8.

That’s because your capital is $50 and your profit is $90.

That is why LEAPS Call Options can magnify your returns yet reduce your risk!

What Are the Downsides of LEAPS?

Now, while LEAPS Options can be very powerful tools to increase your profits and reduce your risk…

There are some disadvantages to these types of Options.

Disadvantage #1: No dividends

As with all Options, LEAPS Options do not receive any dividends.

If you are the type of investor that wants to collect dividends, then the LEAPS Call Options might not be for you.

That is why the LEAPS Call Options would be better suited to growth stocks that pay little to no dividends.

Disadvantage #2: LEAPS have a “fixed lifespan”

Although LEAPS Options have very far-out expiration dates, it still has a fixed lifespan when it will expire.

So if for some reason, your stock does not go up at all from the time you bought it to the time your Option expires…

You would lose all the Extrinsic Value in the Option, on top of the Intrinsic Value you lost.

Also, you’d need to know what happens at expiration.

For example, if you bought the LEAPS Call Option with a strike price of 70 and the stock price closes at $100 when the Option expires…

Your Option is considered In-The-Money, and that means your broker would exercise your Option resulting in your owning 100 shares at $70.

This also means that you need to have $7,000 in your brokerage account to fulfill the purchase of the 100 shares.

But if the stock closes below $70, then your Option is considered Out-Of-The-Money.

And that means your Option will expire worthless and you lose whatever you paid for the Option.

But of course, in both scenarios, you can roll your Options well before the Option’s expiration date to avoid either of the above scenarios.

So these are things you must keep in mind when you buy LEAPS Options.

3 Simple Steps To Get Your Favorite Stocks At Half-Price Using LEAPS Options

So here are 3 simple steps that you can use to get your favorite stocks at half-price using LEAPS Call Options.

Step 1: Look for the longest-dated Options

The reason why we want to look for the longest-dated Options is because the Extrinsic Value we pay is lesser per day compared to shorter-dated Options.

In the image above is the Options Chain with DTE 30.

If you take a look at the Option with the 110 strike price, you will see that it has an Extrinsic Value of $6.08.

If you divide that by 30 days, that would give an average Extrinsic Value decay of $0.2026.

That means this Option is losing $20.26 on average per day due to time decay.

Now, let’s compare this to the LEAPS Option with the same strike.

In the image above is the Options Chain with DTE 583.

Similarly, we want to take a look at the Option with the 110 strike price.

For this Option, the Extrinsic Value is $21.30.

Divide this by 583 days, and it would give an average Extrinsic Value decay of $0.0365.

That means this Option is losing $3.65 on average per day due to time decay.

That’s a big difference compared to the Option with DTE 30!

That is why as much as possible, we want to go for the furthest-dated Option that gives us the least amount of time decay.

Step 2: Look for DITM Calls (Delta > 0.80)

The next step is to only go for the Options that are Deep-In-The-Money.

That’s because DITM Options have lower Extrinsic Value.

And by DITM Options, I mean Options that are greater than 0.80 delta.

The higher the delta, the lesser we are paying in Extrinsic Value.

In the screenshot above, you can see that the Extrinsic Vale is in the green box, and the corresponding delta is in the yellow box.

If you noticed, the higher the delta is, the lesser the Extrinsic Value.

That is why when we’re buying LEAPS Call Options as a stock replacement strategy, we want to stay away from Out-Of-The-Money Options.

Although they are cheaper to purchase, you are paying for only Extrinsic Value.

And this is pretty much the same as buying “hope”, where you’re hoping the stock goes up quickly by the Option’s expiration date.

Step 3: Place a Buy Limit Order for the LEAPS at half-price

Let’s say the current price of the stock is at $100 and you’ve decided to buy when the stock drops below $90.

In this case, to buy the LEAPS Call Option at half-price of the underlying stock, you simply choose the Option with the strike price of 45 and place a Limit Order to buy at $45.00.

That means the capital to put up for buying this LEAPS Call Option would be $4,500.

And let’s say if you’ve decided to buy only when the stock drops below $80…

Then you’d look for the Option with the strike price of 40 and place a Limit Order to buy at $40.00.

That’s it!

Now that you know the power of the LEAPS Options, let me know in the comments below which stocks you’ve purchased LEAPS Options in!