Selling Call Options on LEAPS for faster profits (advanced topic for experienced investors)

Editor’s Note: This article is a special guest post from an experienced options trader and leader in the options community, Peter Berger. Peter has been investing and trading in options for over 15 years. He regularly trades with covered calls and more exotic option combinations. Peter lives in The Netherlands. He is also the owner and moderator for the Facebook group “Seven Figures Road.” We will provide a link to that group at the end of this article. However it is for people who read and speak in Dutch so it will only be valuable for you if you are fluent in that language. Thank you Peter for this article - and also being fluent in English!

An AIM portfolio can hold several LEAPS which will be rebalanced by the rules as described in the books by Jeffrey Weber such as Here Are the Customers’ Yachts and AIM for Millions with Stock Options.

 

While the system works very well, especially with LEAPS, it is possible to increase your profits even more by selling call options against the LEAPS you hold.

 

Those familiar with Jeff’s method of AIM investing with LEAPS know that he has perfected the strategy of using the longest period options of LEAPS. These have an option period of two to three years.

 

However, most of the recommended stocks which have LEAPS also have weekly options. That means that those options expire every Friday. Therefore, you can cash in some extra money almost every week.

 

The way I select the LEAPS is that they are “at the money” or close to “at the money” when I buy them. In that case it is possible to sell “out of the money” options against the LEAPS you own.

 

Here is an example. As I write this it is November 6th 2020.

 

Suppose you open 10 LEAPS contracts on APPLE.

 

As of November 6, the APPLE contracts expiring January 20 2023 are more than 2 years from expiration and they will cost you around $23.00 to buy.

 

Say you open 10 contracts at a strike price of 120 @ $23.00 for a total of $23,000.

 

On these contracts you can sell weekly options on APPLE.

 

The call options which expire on November 13th (which is 1 week from now) with a strike price of 123 are selling for $55.0.

 

If you sell 10 contracts you receive $550. That is 2.3% of your investment.
Those options are 6% out of the money, meaning that APPLE has to increase 6% in 1 week before you have to adjust your position.

 

If APPLE closes below 123 on expiration, the options expire worthless and you can sell another 10 contracts expiring the next week.

 

Basically, it works the same as it would for a covered call except you are using LEAPS instead of stocks.

 

(If you are not experienced and successful with covered calls then this article is not for you. Do not try it until you have done more simple and safe trading with options in which case I recommend you learn from Jeff and his method to focus on the longest term options with 2-3 years until expiration.) 

 

Now, it doesn’t always work out like this and sometimes you will have to adjust your position.
This means you have to roll your options to a higher strike price and/or an expiration date further in the future.

 

Rolling options might cost you some profit but remember if you have to adjust the position, APPLE also increased by 6% and your LEAPS will have increased significantly offsetting any loss you might have. 

 

Selling short term out of the money options can be an extra boost to your AIM portfolio profits with no extra risk and when you get the hang of it is very easy to implement. I generally go for options that are 5% or more out of the money or yield at least $0.30$ to $0.40 depending on the underlying stock and its volatility.

 

Perhaps this is something you might want to consider to earn your profits sooner - and larger - with LEAPS.
Peter Berger
Find Peter on Facebook:
Peter Berger personal page:  https://www.facebook.com/petersoptions
Seven Figures Road investing group: https://www.facebook.com/groups/1093775800639077
DISCLAIMER:
Jeffrey Weber and JJJ Investing Services are not an investment adviser and give only their personal view and opinion, never making any investment advice or recommendation to buy or sell specific securities. Investors in financial assets must do so at their own responsibility and with due caution as they involve a significant degree of risk. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.

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