I watched an interesting video from Financial YouTuber Brad Finn on why one shouldn’t buy OTM LEAPS Call as there is no intrinsic value and there is only extrinsic value, which is risky considering IV and Theta (greek measuring time decay) can work against you as time passes. I think the explanation in this video sums up why I am getting all the sticks for sharing that I bought and will continue to buy OTM LEAPS with low delta.
I particularly resonate with one of the replies in this video and here it goes:
“It is all about leverage. The more leverage you have the more potential gain you can achieve, but also more risk of losing your investment. An ITM LEAPS is about a 2 to 3 X leverage play over buying the stock. An OTM LEAPS is 5X+ higher leverage over the ITM leaps. In your video scenario, if the stock went from $29 to $39 the value of the OTM Leaps will most likely double (Check the $30 strike on your screenshot and you can get an idea of how the market would value an option $1 from the share price, assuming IV is about the same). The ROI of the OTM would be 100%+, whereas the ROI of the ITM would be 12.5%. It is simply leverage and risk. I agree with you Brad on why it is risky.”
Indeed, an OTM LEAPS gives more leverage, which resulted in more gain. To manage the risk of options contract expiring worthless close to the expiration date or letting time decay slowly eat away the premium, I did the following:
- Sell off my LEAPS way before expiration. As long as the LEAPS is already profitable, I will find opportunities to sell it off and not wait till it is near the expiration date and losing its value exponentially.
- Because OTM LEAPS is much cheaper than ITM LEAPS, I am able to buy LEAPS CALL on fundamentally strong companies like Alphabet, Apple, Facebook, AMD and Nvidia. These big tech and semiconductor companies make up 80% of my LEAPS portfolio. They have a higher chance of going up, esepcially in the long run, so it lowers my risk of LEAPS going against me. When the share price goes up, I take advantage of the leverage to earn a bigger profits.
Related Articles:
How Does LEAPS Works And How I Use LEAPS To Maximise Gains?
Why I Buy LEAPS With A Low Delta?
[Proof Of Concept] Why LEAPS Options With Low Delta Works
How I Use LEAPS To 10X My Returns
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