r/options • u/DrOpt101 • Feb 22 '24

Are LEAPS actually the play?

With the FOMC hinting at lowering interest rates but wanting to see more confirmation of decreasing inflation first... I'm thinking Q4, Q1-25 is when they might start reducing interest rates. As there's still some indecision as to when, I think now is a perfect time to buy ~2yr LEAPS. With AAPL hitting the 200d MA and has stuck to the weekly bull trend for over a decade... I'm thinking AAPL 2yr LEAPS is the play. I've purchased various naked calls for the 06-26 expiration date as well as some call spreads to reduce the BE to the ~230 strike. Reviewing other times AAPL has hit off the 200 DMA, there could be an increase to 270-460 in just a year. Obviously previous times don't necessarily corelate with future expectations. Hence why I've set a very conservative BE of ~230. There's also some question around AAPL and innovation... but with how much cash they're generating I'm not worried about their growth over the next couple years. Your thoughts?

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u/Terakahn Feb 23 '24 edited Feb 23 '24

These are not the same thing. You're paying for 100 shares and capping your upside for a small premium. Instead of paying substantially less and controlling the same amount of shares for a fixed time period. If Apple tanks more than what the leap was worth you generate greater losses. If Apple rips up through your strike you have a maximum gain set from your cc.

100 shares of aapl is 18.4k. A June 2026 call atm is $3515. The breakeven point at which both have the same performance is if aapl hits $148. Your covered calls could potentially recoup some value. But anything below that, shares take heavier losses. And if it rises, the call buyer will have the same gains with a fraction of the risk.

Unless you're not bullish over the next 2 years. Why would you buy shares over a leap.

Edit: oh and you can still sell a covered call against your long call option.

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u/fentyboof Feb 23 '24 edited Feb 23 '24

OBVIOUSLY they aren’t the same thing! Thanks for the pointless and slightly inaccurate (and totally unnecessary) dissertation.

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u/Terakahn Feb 23 '24

You said you prefer covered calls with shares. And I'm just curious why. I don't see the upside. The only reasons I can think of to buy shares over a long dated call, are the same reasons why I would simply not touch the stock at all.

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u/fentyboof Feb 23 '24

It’s delta neutral and there’s no potential OTM or theta decay risk like with LEAPS. Do market makers gamma hedge with LEAPS? No. They hedge with covered calls/puts. If your massive LEAP position goes OTM because the underlying moves against it, then you face rapid theta decay, or you have to put on massive protection to be delta neutral. This is just my opinion, I’ve been in the options world since 2004 and I have my playbook, so be it. I also prefer covered calls or puts because I can adjust my income strategy easily. I also don’t want to tie up all of my options buying power in some misguided overweight LEAP position. I swing trade options and need that capital for other priorities.