Covered Leaps
Selling covered LEAPS (Long Term Equity Anticipation Securities) is a popular way for stock market investors to generate income with their stock portfolios, without necessarily having to sell their stock.
Covered Leaps are very similar to covered calls. What sets leaps apart from regular options is primarily the length of time until they expire – a leap has a much longer time before it expires, vs. standard options you may already be trading. This gives the option seller the advantage of receiving more premium money up front when the option is sold, due to the relatively long time to expiration.
The way investors use covered LEAPS to make money is by selling a leap option contract, using stock already held in their trading account as collateral. If this sounds familiar, it is just like writing a covered call. Thats right, LEAPS represent 100 shares of stock, just like a regular call or put option. The main difference between a regular options contract and a LEAPS contract is the length of time to expiration.
There are several advantages that covered leaps have over normal stock covered calls. First, you receive a larger premium up front. This is due to the longer time to the option expiration date. Next, if you are executing a covered call strategy where you sell a new call contract against your stock when the old one expires, you will have lower trading commissions with LEAPS. Finally, with the longer time horizon associated with LEAPs, an individual investor has a longer time period to plan out with a known risk/reward factor.
As you can see, covered LEAPS are as easy to use as regular options, and can provide you with several advantages when using them in a covered call strategy. You should consider using them in your covered call writing strategy.