I receive a few comments when I share that I bought LEAPS contract with a low Delta. Some readers think that I do not understand options trading and that buying a LEAPS contract at a lower delta has an extremely low chance of being successful (at reaching the strike price).
However, in a LEAPS contract, you do not need to hit the strike price in order to earn profits. A lower delta may translate to a high strike price which may not be reached eventually. However, we can gain profits as long as the share price rises above our purchased price.
On 22 Oct 21, I share in this article that I bought an Alphabet LEAPS with a strike price of $3500 and a Delta of 0.169. I paid a premium of $47.85 or $4785 for the whole contract. Alphabet’s (GOOG) share price was $2848.
See Article: How I Use LEAPS To 10X My Returns
On today (28 Oct 21), Alphabet’s share price is currently trading at $2953 after a strong earning result yesterday. The premium has increased to $7500, a 56.7% increase from the premium I paid at $4785. The share price on the other hand increased by 3.69% from $2848 to $2953. The current share price is nowhere near my strike price of $3500.
Let me share another example.
On 15 Oct 21, I bought a Tesla LEAP Contract and details are as follow:
Type of Option: LEAPS Call
Date of Expiration: 20 Jan 2023 (461 days to expiration)
Delta: 0.194
Strike price: $1500
Premium Price: $37.50
Share price of Tesla on 15 Oct 21: $839.70
On 26 Oct 21, the LEAPS contract is now $1018, the LEAPS contract is worth around $87, which is a 132% profits and Tesla share price is nowhere near the strike price of $1500.
From these 2 examples, you can understand 2 points:
1) You do not need to wait until the share price to reach the strike price to make profits
2) LEAPS magnify your returns in a bullish uptrend, a 21.2% increase in share price translate to 132% returns in the premium price for my Tesla LEAPS and a 56.7% increase in premium for a 3.69% increase in share price for Alphabet (Google).
Conclusion
I hope this article is useful to you in some ways and please do check out the below articles for LEAPS strategies and how I made massive profits by using these strategies for the past year.
Related Articles:
[Proof Of Concept] Why LEAPS Options With Low Delta Works
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
Why I Buy LEAPS With A Low Delta?
My Biggest LEAPS Options Contract Closed, 173.8% Returns In 10 Days
The Power Of LEAPS: Tesla LEAPS Is Up 340% In Just 18 Days
Thank You Tesla & Elon Musk For The 470% Profits
Understanding How CALL Option Works
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If you’re looking at short term gains then using short term options is a far far more efficient way to do it. Those leap calls that you say went up 100%, the same amount in 1 week calls would have gone up many times that percentage.
I admire your dedication to writing this stuff up, and I appreciate your opinions, its just that if you’re going to capitalize on a short term bullish move as you say you did above then the short term options offer much much greater returns.
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Hi Howard, thanks for sharing your thoughts! I totally agree that the shorter term calls can reap higher returns delta is higher and strike price can be lower. However, there is always a risk that share price will go sideways or downwards. In that case, the leaps works against us and we have a shorter runway to tide the volatility. This happens when I bought shorter term call for pfizer and it went down for a couple months. Time is ticking down and the leaps is still in the red. It is a stressful situation to be in. Thus, I rather earn less and keep my expiration as long as I can now.
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One the one hand you’re trying to tell people how great the leaps did on a short term move but on the other hand you’re claiming you’re in for the long haul. The bottom line is on short term moves the short dated options will outperform the LEAPs by massive margins. No sense in wasting time talking about short term moves with LEAPs. As far as the effects.of volatility the LEAP’s have huge Vega in them therefore as.volatility falls they get crushed.
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I did not advocate buying LEAPS for the short term. I think you misunderstood that. I said my LEAPS rise a lot in value in a short period of time, and that is because the share price increase a lot too, LEAPS merely magnify the gains. In my post explaining about LEAPS, I specifically mentioned in strategy 4 to buy longer-term LEAPS so that I can stomach the volatility:
https://learninginvestmentwithjasoncai.com/2021/10/27/how-does-leaps-works-and-how-i-use-leaps-to-maximise-gains/
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thanks for your great job and education. A question: why don t you sell weekly or monthly call against your leaps with a delta for example 0;40 or 0.50? The return will be greater. Thanks
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Hi Morico, that is a great question. There are a few reasons actually. First would be the trading platform I am using, ibkr, does not recognise my leaps as a form of owning the shares, thus doesnt allow me to sell covered call against it. Secondly, I may be buying and selling often, if I sell the long leg, then the short leg becomes a naked call. Lastly, spread has a max profit while leaps has unlimited upside. So, I prefer leaps as it is.
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Hi Jason, thanks for sharing! What if the stock goes down, how does it look like?
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Hey Terence, thanks for dropping by! When the share price falls, the premium will fall also, maybe at a slower rate as the delta of the contract falls together with the share price, but maximum loss is capped by the premium paid. So far, my biggest loss (per contract) comes from ITM LEAPS options as the premium is high and they have also turned from ITM to OTM due to the market crash.
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Hey Jason,
Thank you. Great information on OTM Leaps.
However, I noticed that if you buy a OTM Leaps, when the stock price rises late, in other words, it only goes up towards the end of the LEAPS holding period, you will still lose almost all of the money because of the time decay.
OTM LEAPS only works when the stock price goes up right after you bought it. And it needs to go up fast and by a lot.
I just don’t see why it is good to buy OTM Leaps, if you’re convinced that the stock will go up soon, why don’t you just buy some near-term options to gain even more? Sure, if you’re wrong, you don’t time to let the stock come back up. But this also applies to long-term OTM LEAPS or am I wrong? Thanks.
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Hey Njet,
Thanks for dropping by.
Yes, you are right, LEAPS or CALL options are subjected to the risk of theta (time decay), especially towards the end of the contract where there is an exponential drop in time decay. The idea of LEAPS is to capitalize on the longer period before that sharp drop (usually in the last 30-45 days) to profit from the share price increase. That said, OTM will need the share price to increase fast, like in the bullish year of 2021, to generate a great return in a short period of time. The longer the LEAPS drag, the more value it will drop. So, even if the share price increase by 10 to 20% over 6 months, you are likely to make a loss. This method is suitable for fast in fast out.
You may have noticed that this post was written in Oct 2021 where the bull market was about to reached its peak. Since then, the 485k LEAPS portfolio that I had since the start of 2022 had been totally destroyed by the Bear Market of 2022 and theta decay. You can read more here:
https://learninginvestmentwithjasoncai.com/2022/12/19/i-closed-all-my-remaining-leaps-call-positions-at-a-total-loss-of-sgd415k-usd306k/
Wish you all the best for your trading journey!
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Hey Jason,
Thanks a lot for your clarification. This is really helpful and confirmed my suspicion.
I really enjoyed your blog and have been reading it with great pleasure. Thanks for sharing your knowledge and all the best for your trading journey as well!
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Hi Njet, thanks for taking time to read the blog and I am glad you find the content useful. I wish all the best in your investing/ trading journey as well, good luck!
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