I have been asked why I am buying Alphabet LEAPS CALL option with a high strike price and low delta. A low delta means a low premium price increase/ decrease with the corresponding share price movement.
There are a few reasons why I choose a low delta for my LEAPS options.
Lower Delta, Lower Premium
The biggest reason is that the lower the delta, the lower the premium. For an expensive stock like Alphabet, a high delta will mean I am paying close to full price of owning 100 units of shares per contract, i.e each LEAPS contract can cost almost USD$280,000. That is way out of my trading budget.
Buying More Contracts
When I invest a lower premium for each contract, I give myself the flexibility to buy more contracts as well as sell and take profits when the share price rises. E.g. using a capital of $50,000, I can either buy one LEAPS contract at a high delta or 5 LEAPS contracts at a lower delta. And when the share prices, I can sell off 2 contracts and wait to see if the share price will increase further, thus allowing me to bag a bigger overall gain for my investment.
Slower Rate Of Premium Falling
Furthermore, if the trend works against me, i.e.share price keeps falling, the rate of decrease in premium price will be lower due to a lower delta, as compared to a contract with high delta.
Average Down
When the share price drops, so does the premium of the LEAPS. With a lower premium paid, it will be easier to average down as compared to paying a high premium upfront for an ITM LEAPS. When I first started on LEAPS, I took the advice of the “options expert” and bought many ITM LEAPS. When the share price dropped, I got stuck with a significant drop in premium (delta) and a larger capital to average down. Even if I do managed to average down, I am still left with high average price.
Higher Growth
Using my LEAPS growth formula, the expected % growth of premium price relative to a % share price gain will be higher as the denominator of the equation is the premium price, i.e lower the denominator, the higher the expected growth.
Making Money When Share Price Rises
Lastly, while a low delta may mean that the chance of hitting strike price is lower (on expiration date), it does not mean that I make money only when the strike price is achieved. The strike price can be far ahead but as long as the share price has risen significantly above my buy price (but still nowhere near the strike price), my premium price would have increased and I can sell off the contract to earn a profit.
I hope this strategy helps friends who stay off LEAPS because of the high premium, especially for the big Tech stocks, which I buy extensively for my LEAPS contracts. You can read my guiding principles and the risks of buying LEAPS articles to help you make a better decision when it comes to buying LEAPS.
Related Articles:
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
I Was Laughed At When I Told Them I Bought LEAPS With A Low Delta
Understanding How CALL Option Works
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Hi Jason, thanks for sharing this. In your opinion, what’s the threshold considered as low delta, for example below 0.2?
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Hi Kk, thanks for your question. I don’t have a specific range. I usually buy LEAPS with a premium that is 10% of the current price. With my growth formula, it should work out to 5x the gains. But for bigger companies like Alphabet, I will keep to 5% or lesser. Again, with the growth formula, I try to achieve a minimum 4x gain. So the delta can range from 0.1 to 0.3 or more.
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Hi Jason, i hv small account size
e.g. (1)when u feel the stock bullish Buy Call option,
(2) did u do Leaps on bearish Buy Put option.
I saw yr trades but could not find 0.19 delta, probably i didnt see properly.
Pls advice.
Thanks.
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Hi Sophie, I did not buy any LEAPS PUT until recently, where I feel Rivian will go down after being hyped up. I also bought a LEAPS PUT for Disney to hedge against my DIS LEAPS CALLS that have lost 50% in value. Other than that, the rest of my 100 LEAPS are all CALL. The US market generally goes up in the long run so CALL will be better for long term.
For the 0.19 delta, are you referring to this thread?
https://learninginvestmentwithjasoncai.com/2021/10/28/i-was-laughed-at-when-i-told-them-i-bought-leaps-with-a-low-delta/
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You can either do the Wheel with stocks that are cheaper like Bank of America (BAC), and collect consistent returns every month or you can invest them in OTM LEAPS for big tech such as Apple or Microsoft and wait for them to grow, before selling your LEAPS contract to earn a premium. From there, you can grow your 10k to 12k, 15k and beyond. All the best!
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Hi Jason, you mentioned that “the strike price can be far ahead but as long as the share price has risen significantly above my buy price but still nowhere near the strike price”. Question, how we determined if the share price has risen SIGNIFICANTLY ? Thanks.
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Hi Tony, I was being conservative when I say we only earn when share price increases SIGNIFICANTLY. The fact is when share price increases above your purchase price, then your premium will increase, by definition of delta. However, IV is also at play, so when IV drops because share price increases, the premium will also drop. Thus, to be on the safe side, a 10% increase in share price should give you decent profits. But often, you do no need so much. Try to use this LEAPS growth formula to help you choose too:
https://learninginvestmentwithjasoncai.com/2021/12/19/what-is-my-leaps-growth-formula-read-this-before-buying-leaps/
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Thanks Jason for your kind sharing.
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You are most welcome, Tony 🙂
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