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Why we switch to LEAPS

If you check out our latest strangles then you might have realized, that most options we chose now are expiring January 2021. We would like to explain why we switched from 6 months to 10 months and why we might even consider chosing 2022 expiration in the future.


What are LEAPS?


LEAPS (Long-Term Equity Anticipation Security) are options with an expiration date fare out into the future. A very good definition can be found at Investopedia here.


Typical options run between 1 and nine months. In most cases in the past we had strangles with a lifetime of 6 months. LEAPS instead run 1 year or even 2 years. They are not available for every underlying but if they are then in moste cases they currently expire in January 2021 or January 2022.


Why are we considering LEAPS?


Did we not do well with shorter running strangles? Yes we did well.


BUT – in our private account we recently held an AAL strangle which expired worthless in February – and now in March the puts would have been a 7-bagger, as AAL dropped from 25 $ down to 17 $. We had the right idea but time was running out.


With a Leap we would have made a huge profit. And if AAl would not have moved we could have rescued some money because if the expiration is some months into the future the call and put will have some time-value (even if they are both way out of the money). For example we could sell the strangle 3 or even 6 months before expiration and switch into a longer lasting Leap. A move like this is nearly impossible with short running options as they have nearly no time value and will be worthless if the underlying did not move into the right direction.


By the way, we similar bad situations like with American Airlines in the past. Right idea but timimg did not work. Off course this can happen with a Leap as well, but here we have much more time to consider our next move.


The advantages of LEAPS


  • Because there is more time for the predicted stock move to play out, LEAPS suffer less from time decay.

  • This results in a higher potential for the option to prove profitable.

  • The “time value” – the value attached to the option due to the time left to become profitable before expiring – of LEAPS erodes more slowly than is the case with traditional options.

However, the added time value also makes LEAPS more expensive than shorter-term options with the same strike.


Enjoy life - don't waste it studying option prices


Another huge advatage of Leaps is -> we will have more time to consider selling. Sometimes the window of opportunity is only one day or even a single hour to get out with a profit. But life should not be spend in front of a monitor (that's our believe).


Does this mean we will ONLY trade Leaps from now on? No! we just opened and closed a strangle on VXX within 24 hours (with success). But very often we have an idea or believe in a story but these ideads might tkae longer than thought before they become a reality. And we would like to have this time.


This being said -> Strangle ahead !






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