By Paul Price of Market Shadows
LEAP Options don’t have to last years.
Many option traders avoid selling LEAP (Long-term Equity AnticiPation) options because they don't want to be tied up in a trade for one to three years. And many traders desire short-term thrills and quick profit and loss feedback. However, smart traders might consider longer-duration options instead, or as well, as shorter-duration options.
The CBOE lists some of the benefits traders may be missing if they pass up using LEAPS as part of their overall investment tool box.
I trade long-term options regularly. I love the flexibility that one and two year expiration dates give me, especially when selling puts. The longer time-frame generates very large time premiums which lower my break-even points significantly.
Those big per share inflows also protect me to a great extent against early exercise even when things don’t go as planned right away. Buyers aren't likely to use a LEAP option 10, 15 or 25 months early when they paid big bucks for that extra time.
Writing for Jan. 2015 or 2016 allows time for earnings growth or other potentially good news to occur. It reduces the need for precision timing in the underlying stock's projected uptrend or downtrend.
Best of all, selling long-term expirations doesn’t prohibit you from closing out early if you choose to do so.
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You can see all the closed-out and current positions in my Market Shadows Virtual Put Writing Portfolio by clicking on the hyperlink. It shows every option trade we've made since we started it up back in January, 2013.
