When we want to go bullish on a long-term investment, the default strategy is to buy stocks.
If we buy LEAPS Call options instead, we can be bullish on the underlying over the long term as well, and use the increased leverage on options trading to increase our return on investment.
We'll also share tips on finding the best long LEAPS Call options to trade.
Contents
What Are LEAPS Call Options?
LEAPS Call options is a type of Long Term Equity Anticipation Securities, which is a Call options contract with at least 1 year to expiration. A long LEAPS Call is a long-term bullish trade with a great return on capital.
If we believe the PayPal stock price has reached a bottom, and anticipate a bullish trend, we can buy a 0.90 delta LEAPS Call at $40 that expires in a year.
The trade requires $4,210 in buying power and will be profitable when the stock price rises beyond $82.1 in a year.
Why Buy a LEAPS Call?
A long LEAPS Call has higher leverage than buying stocks, and will have a greater return on capital if the stock price rises as expected.
A stock trade that uses a comparable $4,200 buying power can purchase 54 shares of PayPal stock. The trade becomes profitable when the stock price rises beyond $78.
By comparing the two trading strategies, we can see the probability of profit is the same for both LEAPS Calls and buying stocks.
If we expect the PYPL stock to rise to $100 within a year, the long LEAPS Call will make 42.5% in profit, while the stock purchase only makes 28.7% in profit.
| Strategy | Buying power | Profit at $100 | Return on capital at $100 |
|---|---|---|---|
| Buy LEAPS Call | $4,210 | $1,790 | 42.5% |
| Stocks | $4,195 | $1,205 | 28.7% |
Since the probability analysis of a long LEAPS Call is similar to buying stocks, it is a common way to create a Poor Man's Covered Call, to let us trade like Covered Calls while using less buying power.
What Are the Key Points to Profitable LEAPS Calls?
When buying LEAPS Call options, we want to choose deep ITM, 0.90 delta, strike prices to increase our probability of profit. We also want to have more than 1 year to expiration to give the stock enough time to make the Call profitable.
Let's compare deep ITM and ATM LEAPS Call options to see the impact of different deltas. Even though the 0.90 delta Call requires more buying power, the higher delta makes the option's value follow more closely with the stock price movement. The lower strike price also gives us more room to profit and a better breakeven price.
| Strike price | Buying power | Breakeven price |
|---|---|---|
| Deep ITM | $4,210 | $82.1 |
| ATM | $1,740 | $94.9 |
If we compare the different Call options' expiration dates for the same strike price, we can see a LEAPS Call that expires in a year require 9% more premium than a Call that expires in 2 months. But the LEAPS option has 6 times more days for us to wait for the stock price to meet our bullish expectation.
| Days to expiration | Buying power | Breakeven price |
|---|---|---|
| 1 year | $4,210 | $82.1 |
| 2 months | $3,850 | $78.5 |
We also need to be aware of the increasing theta decay when the LEAPS Call is close to expiration. So we usually buy to close our trades around 45 days before expiration no matter what. So we can close our position when there is still enough time value in the trade.
How to Find the Best LEAPS Calls
A long LEAPS Call is a long-term bullish trade that works well with the Bullish Value Stocks list to find undervalued blue-chip stocks.
We can use Upside to order the list to find BABA as one of the most undervalued stocks. The $276 Fair Value means the stock price has a potential 134% Upside. The Long Signal Days show Alibaba reached the bottom 16 trading days ago.
Since BABA is a growth stock that doesn't pay out dividends, there is no point to hold stocks. Which makes this a good opportunity to buy LEAPS Call options.
A second look at the BABA price chart confirms the stock reached a low on 6/3, roughly 16 trading days ago, and has been on a bullish run ever since. We can be confident in buying a LEAPS Call to take advantage of the bullish outlook.
A long 0.90 delta BABA LEAPS Call that expires in a year requires $6,590 in buying power. If the stock price reaches the $276 Fair Value in a year, the return on capital is 227%.
Now you know how to buy LEAPS Call options to profit from a long-term bullish stock, so you can take advantage of the higher leverage to make more money than simply buying shares.
I like how the LEAPS Call can use less buying power to make more returns than buying stocks.
I’ll give it a try.
Yes, LEAPS Call is a good way to use the options’ leverage while minimising the time pressure on the contract expiration.