Over the last several months, I've shown you numerous options trading strategies that you can use to make serious money in the markets – simple call and put buys, bullish and bearish "loophole trades," straddles, and more.
But the constant in each of the strategies is that they have all been relatively short-term trade setups designed to work within 20 to 30 days with options that expire in about 45 minutes.
The mindset has been get in, get out, and turn your profits pretty quickly – typically, the more efficiently you can use your capital, the better.
But I recognize that a lot of you come from a longer-term, buy-and-hold background. And I understand that this shorter-term, options-based way of generating income can be a bit much to take in as quickly as one would like.
So today, I'm going to show you a long-term options trading strategy you can use to boost your portfolio…
LEAPS is an acronym for long-term equity anticipation securities (the P is often capitalized when it is written out to get the acronym to work).
These are options that allow for a longer time frame until expiration; you can buy many LEAPS as far out as two years and eight months before expiration.
They were created around 1990 and started out only available on stocks, but eventually became available on indexes. Nowadays you can even find these on exchange-traded funds (ETFs).
These are most often (but not exclusively) written for January of whichever year up to two years out. Right now, in October 2015, you can buy LEAPS on underlying securities for October and November, whichever month comes next in that issue's option expiration cycle, as well as January 2016, 2017, and maybe even 2018. The January 2017 and 2018 would be considered LEAPS.
LEAPS options are in truth no different than their shorter-term siblings in that they have an expiration date, they can be found for both calls and puts, and they can be exercised at a given strike price.
But they come with some pretty terrific benefits…
The Benefits of Trading LEAPS
The primary benefit of LEAPS from an investment standpoint is they allow options traders the opportunity to take part in an underlying stock's ability to make prolonged price moves without having to trade in and out of shorter-term option positions (racking up lots of brokerage fees in the process). One doesn't have to stay quite as busy trading options like this.
LEAPS also allow traders to take advantage of the fact options are a way to leverage one's cost in the trade. Since cost is risk, subsequently one's risk is minimized over a straight stock purchase.
Take a look at the chart below on Nike Inc. (NYSE: NKE).
When buying LEAPS, I typically like to consider doing so on an underlying stock that shows a habit of sustaining substantial price moves over long periods of time. NKE fits that bill, showing a nice year-to-date uptrend.
Trading LEAPS vs. Trading the Underlying
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.