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Profitable LEAPS Trading


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Profitable LEAPS Trading

An often used alternative to medium term investment is profitable LEAPS trading. LEAPS is an acronym. It stands for Long Term Equity AnticiPation Security. A LEAPS is an options contract with a two or three year term until expiration. There are for well over two thousand equities as well as nearly two dozen indexes available for LEAPS trading. These are available on the Chicago Board Options Exchange, a branch of the CME Group. An investor can purchase a LEAPS option instead of buying a stock. The price is less and the worst that he or she can do is lose the price of the options contract. In profitable LEAPS trading one can buy calls to lock in investment opportunity or buy puts to hedge risk in a rising stock. As not all trades are successful one must ask the question, how to trades fail in otherwise profitable LEAPS trading? The best way to avoid problems is to develop and follow a trading strategy. That having been said here is more about profitable LEAPS trading.

Buying and Selling Puts and Calls in Profitable LEAPS Trading

LEAPS options offer the same vehicles as regular options trading, calls and puts. When one buys a call on an equity or equity index with a LEAPS option he or she can purchase the underlying equity at any time up until the expiration date. He or she will pay the strike price, which is the contract price, whatever the price might be at the time of executing the option. Investment risk is limited to the cost of the options contract. Many investors use this approach to leverage their investment capital. If the stock in question rises in price the buyer of a call option can either exit his position and pocket the profits or execute the contract and take possession of the stock at lower than the market price. Profitable LEAPS trading requires that the trader engage in both fundamental and technical analysis of the equities that underlie the LEAPS option.

When one buys a put it can also lead to profitable LEAPS trading. Investors who purchase volatile but rising stocks can purchase a LEAPS option to guarantees their gains. The buyer of a put option pays for the right to sell the stock in question at the contract or strike price no matter how far back it might fall. As with a call contract in profitable LEAPS trading, an options trader can exit a LEAPS contract at any point prior to expiration by executing the opposite trade.

Selling both puts and calls is often the most profitable LEAPS trading. However, the risk of an occasional large loss typically limits the writing of LEAPS options contracts to large institutional traders and others with deep pockets. In selling LEAPS options the seller gains a profit from the sale. However, he or she also agrees to accept the risk of an unexpected market move. Whereas the buyer of a LEAPS option is under no obligation to buy or sell an equity the seller is, ...

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Profitable LEAPS Trading

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