If you’re looking to make some serious profits in the stock market, you need to know about the LEAPS Option Strategy. This is a complex but powerful way to trade options that can produce huge profits in a short period. In this video, we will break down the LEAPS Option Strategy and show you how to use it to your advantage. So if you’re ready to start making some real money in the stock market, keep reading!
We will discuss:
- What are LEAPS options?
- How does the LEAPS Option Strategy work?
- LEAPS Options vs Buying Stocks Outright
- When is the best time to use the LEAPS option strategy?
- How do we put on a LEAPS option trade? LEAPS Option Example
- How do we manage the LEAPS option strategy?
- Conclusion
So let’s get started!
What are LEAPS options?
LEAPS options are long-term options that have an expiration date that is further out than traditional options. The name “LEAPS” stands for “Long-Term Equity Anticipation Securities.” LEAPS options were created in 1990 to give investors the ability to trade options within a longer time frame.
How does the LEAPS Option Strategy work?
The LEAPS Option Strategy works like this. You purchase a LEAPS call option on a stock that you believe will go up in price. The nice thing about LEAPS options is that they are much cheaper than buying the stock outright. So, if the stock does go up in price, your profits can be huge!
I like to purchase a call option that is more than 1 year out in time. The strike price that I like to use is deep in the money since that will give me the most bang for my buck. It also more closely replicates owning 100 shares of stock.
LEAPS Options vs Buying Stocks Outright
One advantage of buying LEAPS options over buying stocks outright is that you don’t have to put up as much money. When you buy a stock, you are responsible for 100% of the price. But when you purchase a LEAPS option, you only have to put up a small percentage of the price.
This is called “leverage” and it can be a powerful tool when used correctly. Of course, leverage can also work against you if the stock price goes down. But that’s why it’s important to only use this strategy on stocks that you are confident will go up in price.
When is the best time to use the LEAPS option strategy?
The best time to use the LEAPS option strategy is when you are bullish on a stock and you have a longer-term time frame. For example, if you believe that a stock will be going up in price over the next year.
A down market or bear market is often a great time to start buying LEAPS options. This is because stock prices are usually depressed during these times and you can get a great deal on LEAPS options.
How do we put on a LEAPS option trade? LEAPS Option Example
Let’s say that you are bullish on Docusign stock and you believe that it will be going up in price over the next year. You could purchase a LEAPS call option with a strike price of $40 that expires in January of 2024. Doing this will cost you $3,285 to control 100 shares of stock. This is versus buying 100 shares that would cost you $6,407. So it is half the cost.
How do we manage the LEAPS option strategy?
There are different theories on managing LEAPS Option trades. I will give you a couple of different methods that are commonly used. Then I will tell you what I like to do.
The first method is to set a price target for the stock and sell the LEAPS call option when the stock hits your target price. This will allow you to lock in your profits and avoid letting the trade run against you.
The second method is to hold the LEAPS call option until it expires. This is a more aggressive approach and it can lead to bigger profits if the stock continues to go up in price. But it also carries more risk because you are letting the trade ride.
I like to use a combination of both methods. I will set a price target for the stock and hold on to the LEAPS call until it hits my target. But I will also sell half of my position at my target price to lock in some profits. This way, I have some downside protection if the stock reverses course, but I still have a chance to make some big profits if the stock continues to go up.
Conclusion
The LEAPS option strategy can be a great way to profit from stocks that you are bullish on. It allows you to get exposure to the stock for a fraction of the price of buying it outright. And if the stock goes up in price, your profits can be huge! Just be sure to use this strategy only on stocks that you are confident will go up in price and monitor your positions.
Do you have any questions about the LEAPS option strategy? Leave a comment below and I will do my best to answer them.