Selling LEAPs puts. That’s not a phrase you’ll hear outside of the investment world, but this can be a profitable avenue for the right investor.
Options traders turn to LEAPs when they want an options contract with less volatility. LEAPs are historically more expensive than shorter-term options due to the length of the contract, but the lower volatility is worth it to some investors.
Before getting into the process of selling LEAPs puts, let’s first go over what both LEAPs and puts are.
Understanding LEAPS and “put” options
The acronym LEAPS stands for long-term equity anticipation securities. These are options contracts that have longer terms than many traditional options contracts. Overall, LEAPs operate in the same way as short-term options, just with a later expiration date. The shortest LEAPs contract is three months, while the longest contracts can have expiration dates many years down the road. For instance, a treasury LEAPs investment can be 20 years down the road.
A “put” option refers to a contract where the writer is obligated to buy a security at the agreed-upon price during a specific time frame. This is only the case if the option buyer exercises the option.
Selling LEAPs puts involves feeling confident in the security
As with all instances of selling put options, you need to feel confident in owning the underlying security, because if the seller chooses to exercise the option, then the investor must buy it. The first step to selling LEAPs put options contracts is to be comfortable with the situation you might be getting into.
A significant benefit of selling LEAPs puts, or any other put option, is that you get to name your price. If you can’t reach an agreement on an attractive price, it’s not worth getting involved with selling the put option.
If you’re selling LEAPs puts, keep the generation of portfolio income in mind. This is a benefit of selling puts. The seller gets to keep the entire premium if the put is not exercised and the contract expires. Selling puts also provides the opportunity to own a stock below current market prices.
All of these benefits of selling puts start with investments that you feel comfortable with and confident in.
Selling LEAPs puts below current market value
As mentioned, LEAPs are less volatile than short-term options because of the more extended expiration periods. From an investing temperament standpoint, LEAPs would work better for conservative investors than traditional options contracts. However, an additional way to make selling LEAPs puts more attractive for conservatively-minded investors is to consider the strike price. A good strategy is to set the strike price at a lower rate than the market’s current rate.
Overall, the best strategy for selling LEAPs puts is to focus on high-quality companies just like you would if you were buying stock in a company directly. Think of the sale as a different way to offer to buy shares of a company you like at a lower price. Companies with a history of financial success, profits, and dividend-payments to shareholders are strong candidates. Do the necessary research on stocks to determine if they fit the criteria of your investment portfolio. Find LEAPs for companies with a good balance sheet and a diverse portfolio of products or services. And remember, the option contract will need to be secured by cash or buying power, so factor that in when considering total return.
Would you feel more confident investing in LEAPs or shorter-term options contracts?