Options investors who can handle high levels of risk and make investments with longer-term expiration periods may use a LEAPS investing strategy. These investors put themselves in a position to lose their entire investment, while subsequently receiving significant returns. For instance, if a LEAP stock rose by 50%, that could equate to a 300% gain.
It’s unlikely that conservative investors will have the same interest in LEAPS as investors who target more aggressive investments. Even though LEAPS have greater risk levels, there are ways to manage and reduce that risk, like using a Rolling LEAP.
Why investors choose to turn to a LEAPS investing strategy
Investors who can accept the risk associated with LEAPS will turn to using this investing strategy when:
- They already have experience investing in options and want longer terms
- They don’t feel the need to own the stock and enjoy shareholder rights
- They want a hedge against a long position or sector headwind
- They enjoy a strategic approach to aggressive investing
- They have more considerable sums of money to put
Understanding LEAPS and short-term options
Options are usually for the fast-money crowd. If an options trader can forecast the stock’s price accurately within a specific time frame, then the trader can make huge profits over a short period.
A LEAPS investing strategy is different from short-term options trading, though. These are longer-term options that expire well into the future and provide opportunities for buy-and-hold investors as well. LEAPS typically have expiration dates that are from nine months to three years in length.
Using a LEAPS investing strategy could work for investors who tend to lean aggressive with their investing. Like conservative investors, investors who feel that a maximum expiration period of three years is still too short for them often avoid LEAPS. Another reason why conservative investors will frequently avoid LEAPS is that selecting wrong can lead to losing the entire investment in a short time.
Buying a Rolling LEAP can help reduce risk
For a Rolling LEAP, investors can buy a call option with an expiration date two years in the future. The following year after buying the call option, you sell it and replace it with another two-year call. This is a way of rolling an option forward. This strategy helps investors retain some of their investment, even if it is somewhat depleted. The strategy of using a Rolling LEAP helps an investor to not lose the entirety of their investment.
Using this LEAPS investing strategy could serve as a long-term strategy for buy-and-hold investors. You get more leverage without the need for more borrowed money. Investors with a diversified portfolio and who have excess cash to spare can add LEAPS more conscientiously than safety-minded, conservative investors.
Using a LEAPS investing strategy is not for everyone, but using LEAPS can benefit the right investors who can handle the risk.
Have you added LEAPS to your portfolio? If so, what is your experience with these investments?