Selling LEAPS (Long-Term Equity Anticipation Securities) put options is a long-term options strategy that can generate profits whether the market goes up, stays flat, or even declines moderately. This strategy offers downside protection, potential high returns, and requires minimal management, making it an attractive approach for investors seeking steady income and stock acquisition opportunities.
When it comes to options trading, many investors seek strategies that can profit regardless of market direction. One such approach is selling LEAPS (Long-Term Equity Anticipation Securities) put options. This strategy allows traders to make money if the market goes up, stays flat, or even declines moderately, provided the price stays above the strike price.
In this article, we explore a simple, long-term options strategy with the potential for solid returns, as explained by experienced options trader Ravish Auya.
LEAPS are call or put options with expiration dates one year or longer. Many investors buy call LEAPS as a stock replacement strategy to gain long-term exposure to stocks or ETFs. For example, buying an in-the-money call LEAP with a delta around 70 can provide significant upside leverage.
However, buying LEAPS involves paying theta premium, which can erode the option's value if the stock does not move favorably.
Instead of buying calls, Ravish sells put LEAPS with expirations one year or longer. This approach can be applied to any stock or ETF. Selling put LEAPS allows the trader to earn theta premium upfront, providing downside protection and income.
Ravish recommends selecting stocks or ETFs that:
Timing the entry after a pullback can improve the cost basis, but the strategy can be executed anytime.
Alternatively, selling a put closer to the money (e.g., $180 strike) can yield higher returns (around 18%) but with less downside protection.
Using margin, the trader can sell naked puts requiring less collateral, amplifying returns (e.g., 103% return on collateral with 27% downside protection).
If assigned, the trader acquires the stock at the strike price, which should be a price they are comfortable holding long-term. After assignment, selling long-term call LEAPS on the stock can generate additional income, creating a "mega wheel" strategy on a yearly basis.
Ravish rates this strategy as a 5 out of 10 on the risk scale, emphasizing responsible use of margin and readiness to manage assignments.
This selling LEAPS strategy is part of a broader portfolio approach where 80% of capital is allocated to long-term strategies and 20% to short-term income generation. The LEAPS selling strategy enhances yield and provides a way to dollar-cost average into stocks over time.
This strategy is not widely discussed online, but traders can learn more from Ravish's YouTube channel and previous interviews on options strategies such as double calendars and low-risk approaches.
Selling LEAPS put options is a versatile, long-term strategy that can generate income and provide downside protection. It allows traders to profit in various market conditions with minimal management. While it carries risks, especially when using margin, careful selection of stocks and strike prices, along with readiness to manage assignments, can make this a valuable addition to an options trader's toolkit.
This strategy, inspired by Warren Buffett's approach at Berkshire Hathaway, offers a disciplined way to enhance returns and acquire quality stocks at attractive prices over time.
Thank you for reading this comprehensive guide on selling LEAPS options. Whether you are a seasoned trader or new to options, understanding this strategy can help you navigate the markets with greater confidence and potential profitability.
