In that instance, the stock dropping to 200 loses all of your value in the leap but if you'd bought shares you'd have lost only 8320 and would still have some value.As the standard template for career pathway development in Nevada, LEAP integrates education, government and industry in a standardized process to ensure that workers have the skills they need to succeed in both the short – and long-term in the New Nevada, that education institutions know what they need to teach, and that companies have a qualified workforce. However, it's somewhat apples-oranges because if you only had 13,120 to spend, then you'd only have 24 NFLX shares rather than 100 shares. If, between now and 2023, NFLX dropped to 200 and you just held, then shares would have 34665 in losses while the leaps you only lost the 13120. For instance, the January 2023 $500 leap would cost you about 13,120 while 100 shares of NFLX would cost you 54665. That last row does end up being a somewhat apples to oranges comparison though because of the value difference. If the stock really tanks, then you can lose way more value in owning the stock while the leap can, at most, lose the premium paid, which will always be less (and often significantly less) than the value of owning the stock. I think I'd add another row to your table. IMO the main con is you need to be more right and sooner than long stock. So what is a main con of buying LEAPS? Why shouldn’t everyone buy LEAPS instead of shares for a longer timeframe? But if you're considering LEAPS then you're probably not trying to build a stable income portfolio anyway. If you replace all or most of your long stock portfolio to LEAPs, because of the above, then a 20% draw down on long stocks might be double or triple that if replaced with LEAPS depending on how much time left on it. Hurts even more as time passes.īigger draw downs. When you're wrong the LEAP hurts much more. Even deep ITM, it's going to be higher than where the stock is currently. Just less so compared to shorter dated calls. If 6 months later your stock end up at exactly the same price as on entry, you're still down a bit with LEAP. Theta decay is much slower on LEAP but it is not nothing. Some cons that goes through my head when I'm buying ITM LEAPS. If you follow all of this then the next leap for many, so to speak, is an income strategy called the Poor Man's Covered Call where you use the LEAP as a surrogate for the stock and you write OTM calls against it. If you still like the upside potential of the stock, it's a good idea to roll your LEAPs out when they become traditional options (less than 9 months until expiration) in order to avoid the accelerating theta decay. Conversely, if the LEAP is cheap (relative to other periods), the underlying stock could be closer to a top than a bottom. If the underlying has dropped a lot, implied volatility is likely to be higher, making them more expensive. LEAPS can suffer from an inverse volatility effect. The share owner receives the dividend and the call owner does not. Try to buy them at the midpoint or better and use spread orders for rolling them. LEAPS tend to have wide bid/ask spreads so adjustments can be more costly. The disadvantage of rolling up is taxation if it's a non sheltered account. You'll give up some delta but in return you'll repatriate some principal. It depends on how deep ITM the call LEAP is, when the drop occurs (near or long before expiration) and what the implied volatility is at that later date.Īn advantage for the call LEAP is that if the underlying rises nicely, you can roll your call up, pulling money off the table and lowering your risk level, something you can't do with long stock. Prior to expiration, the LEAP has even less risk because as the stock drops, the delta of the call drops and that means that the call LEAP will lose less than the stock for each dollar of drop in the stock. Below the strike price, the shareholder continues to lose whereas the call owner loses nothing more. On an expiration basis, the call LEAP has less catastrophic risk than share ownership if share price drops below the current stock price less the cost of the LEAP. LEAPs have very little time decay (theta) for many months which means that the daily cost of ownership is low. Because it is deep ITM, if the implied volatility is reasonable, you'll pay minimal time premium (less if there's a dividend). What you are describing is called the "Stock Replacement Strategy" where you buy one high delta deep ITM call LEAP expiring as far out as possible instead of 100 shares.
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