A strategy to buy LEAPS in the form of long calls might seem an appealing choice for a confirmed Leveraged Investor like myself using options not to trade but to simulate and amplify successful value investing.

After all, LEAPS Long Term Equity AnticiPation Securities allow you to control blocks of shares at a fraction of the cost of purchasing them outright.

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If the delta is high enough, enabling your LEAP call to closely match dollar for dollar moves upward in the underlying stock, you're getting significantly higher returns on your original investment than actual shareholders would. A lot depends on the strike price you choose when you buy LEAPS, of course.

Money A2Z

The deeper it is in the money ITM , the higher the price you pay for the intrinsic value of the LEAP but the less over all time premium you pay for, and the more protection you receive from declines in the underlying stock.

And, as with regular call options , historical and implied volatility plays a significant role. Yes, the theta daily time decay is less for options farther out in time, but much of the value of the individual LEAPS option is determined by its recent and expected volatility. The higher the implied volatility, the more you'll pay to buy LEAPS.

That's also one reason why the bid-ask spread can be so wide. From a risk-reward perspective then, and depending on the individual stock, of course, simply purchasing an in the money LEAP on a quality company with an undervalued share price is probably a no-brainer. Objectively, I don't believe that it's extraordinarily risky or reckless to buy LEAPS.

But, aligning myself with my own personality and psychology, there are nevertheless three fundamental disadvantages that I see to a simple long LEAPS strategy.

But to me, it's a penalty. The underlying stock MUST go up by the amount of the time premium for you to at least break even. Yes, you can theoretically make a killing if the stock moves sharply higher, but if the stock finishes where it started, not only will you have wasted up to a year or two of your life, you'll also have lost money.

What if your assessment of the company and its prospects change? What if you no longer consider it a suitable investment? Or, suppose the stock does perform well.

Too well, in fact. Suppose it moves dramatically higher and you begin to feel that the stock might be overvalued. In either case, if you sell with a lot of time still on the LEAP, and especially if the strike price is still significantly away from the current share price, you'll get to leave a big, juicy tip for the market makers on your way out.

The VIX is an indicator that tracks overall market volatility. Because market declines tend to occur more rapidly and violently than the slow and steady upward march associated with bull markets, market bottoms, or at least short term market bottoms, often correspond to a spike in VIX readings. And likewise, a market top, especially in the short term, will almost always be associated with VIX readings at the low end of its historical range. A similar dynamic occurs with LEAPS.

In a typical value investing mindset, it would seem that the best time to purchase a LEAP is after the underlying security has already fallen substantially in price. But if the stock has recently fallen substantially, then its corresponding implied volatility will most likely have risen. Consequently, the option is more expensive to purchase.

And conversely, if a LEAP option is relatively cheap to purchase, it's cheap because its implied volatility is low, which might be an indication that the underlying stock is closer to a top than a bottom.

In the end, I don't buy LEAPS because LEAP calls are still long calls , and long calls are an uphill battle.

The underlying stock not only must go up for you to make money, it must also go up for you to break even. Yes, due to longer term expirations, LEAP options are arguably much smarter purchases than comparable near term options.

But I still find that LEAP options have enough disadvantages on their own to keep me from ever wanting to buy any as part of a straight, buy and hold leveraged purchase. That's not to say that there's no room whatsoever for LEAP options in a trader or an investor's portfolio. It's just that LEAPS seem much better suited as components of trades or positions a little more complex than a simple buy and hold strategy. For instance, when used as part of intelligent and informed calendar spreads, I think LEAPS provide a tremendous opportunity to generate significant returns.

Additionally, two specific Leveraged Investing strategies I detail in The Essential Leveraged Investing Guide rely on LEAPS. Return from Why I Don't Buy LEAPS to Stock Options Analysis and Articles.

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Why I Don't Buy LEAPS A strategy to buy LEAPS in the form of long calls might seem an appealing choice for a confirmed Leveraged Investor like myself using options not to trade but to simulate and amplify successful value investing. Some Background After all, LEAPS Long Term Equity AnticiPation Securities allow you to control blocks of shares at a fraction of the cost of purchasing them outright.

Return from Why I Don't Buy LEAPS to Stock Options Analysis and Articles Return from Why I Don't Buy LEAPS to Great Option Trading Strategies Home Page.