I was asked by a few readers how I pick my LEAPS and in this article, I will share some guiding principles.
Guiding Principle 1: Pick the fundamentally strong companies.
As LEAPS works best on bullish stocks, I pick companies that are most likely to rise in share price over the long run. These companies include big tech stocks such as Alphabet, Facebook (Meta), Microsoft and Apple, They are among the most valuable companies in the whole world. I also have sizeable positions in semiconductor companies, Nvidia and AMD, because I think their chips will be in huge demand in many years to come.
Guiding Principle 2: Buy LEAPS at a longer expiration date
While I believe that the stock prices of fundamentally good companies will eventually go up, they will go through cycles of up and down. Therefore, having a long expiration date will give me more time to wait for the future share price to become higher than the share price when I bought my LEAPS. Do note that you do not need to hit strike price to make money on LEAPS
Guiding Principle 3: Buy at a premium price I am comfortable to spend
I usually avoid ITM LEAPS call options, though they are highly recommended by options experts due to the intrinsic value and how it mimics the actual share gain. However, ITM LEAPS are very expensive and the intrinsic value is already factored into the premium. I have shared in a previous article on why I love OTM LEAPS option with low delta.
You can read more about all the advantages of buying with an OTM option here:
Why I Buy LEAPS With A Low Delta?
Guiding Principle 4: Exit Strategy
I will take profits on LEAPS which are expiring the soonest. For example, in last Friday’s sell-off, I took profits on my Apple LEAPS that are expiring in June 2022. When the market stays sideways, I will load up new LEAPS that are expiring at the longest possible duration, i.e. Jan 2024, so that I can sell off and take profits on those shorter ones when the market trend reverses.
Guiding Principle 5: My Growth Formula
I share my growth formula in the LEAPS article and after choosing the premium I am comfortable paying, I use the formula to work out how many times more I will gain for a corresponding % increase in share price.
The formula is as follow:
Expected Growth = Delta / (premium price / current share price)
If expected growth is 5, it means if the share price increases by 10%, my LEAPS premium will increase by 50%. I usually choose LEAPS contracts that give me an expected growth greater than 4.
What If Share Price Drops For My LEAPS?
What if the share price starts to drop before there are any profits? That happened to many of my stocks in September this year when there was a minor correction and many tech stocks started to sell off. What I did was to average down on these stocks, by buying the same strike price and expiration dates but at a lower premium, which eventually lead to a lower average price.
I hope this sharing is useful to you in some ways, you may find these articles that I wrote on LEAPS useful for your further reading:
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
[Proof Of Concept] Why LEAPS Options With Low Delta Works
What Delta Value Do I Use For My Trades?
How I Use LEAPS To 10X My Returns
Why I Bought AMD & Nvidia LEAPS At All-Time High?
Revealing My LEAPS Portfolio (16 Nov 2021)
Learning Investment With Jason Cai 