Selling LEAPs puts is, when used properly, a viable strategy to generate income (premium) while you wait for a stock or ETF to hit your preferred price. Think about it like collecting premium for an open buy limit order.
Options traders turn to LEAPs when they want an options contract with less volatility. LEAPs are historically more expensive than shorter-term options due to the length of the contract, but the lower volatility is worth it to some investors.
Before getting into the process of selling LEAPs puts, let’s first go over what both LEAPs and puts are.
Understanding LEAPS and “put” options
The acronym LEAPS stands for long-term equity anticipation securities. These are options contracts that have longer terms than traditional options contracts. Overall, LEAPs operate in the same way as short-term options, just with a later expiration date. The longest contracts can have expiration dates years down the road.
Just like with shorter-dated options, you’ll have an underlying security (stock or ETF), a strike price (the price the stock is bought or sold at) and an expiration date.
A “put” option refers to a contract where the writer is obligated to buy a security at the agreed-upon price during a specific timeframe as opposed to a call, where the writer is obligated to sell a security. This is only the case if the option buyer exercises the option.
Selling LEAPs puts is a bullish strategy
As with all instances of selling put options, you need to be bullish on the underlying security, because if the seller chooses to exercise the option, then you, as the seller of the put must buy it. The first step to selling LEAPs put options contracts is to identify a security you are bullish on for the duration of the contract at a strike price you’d be happy to own the stock at.
A significant benefit of selling LEAPs puts, or any other put option, is that you get to name your price. If you don’t like Tesla (TSLA), for instance, at 180, but you love it at 10, you can sell a put at that strike and the market will pay you a whopping $30 for that (.30 for the July 2025 LEAPs x 100 shares per contract = $30).
If you’re selling LEAPs puts, keep that income in mind. This is a benefit of selling puts. The seller gets to keep the entire premium if the put is not exercised and the contract expires. But the amount you’ll receive (as you can see in the Tesla example) is highly dependent on how likely the market expects your stock to reach the strike. The more the market believes your strike price is within range (for the duration of the contract) the higher the premium.
And remember, selling LEAPs puts is a bullish strategy.
Selling LEAPs puts below current market value
As mentioned, LEAPs are less volatile than short-term options because of the more extended expiration periods. From an investing temperament standpoint, LEAPs would work better for conservative investors than traditional options contracts. However, an additional way to make selling LEAPs puts more attractive for conservatively minded investors is to consider the strike price. A good strategy is to set the strike price at a lower rate than the market’s current rate.
Overall, the best strategy for selling LEAPs puts is to focus on high-quality companies just like you would if you were buying stock in a company directly. Think of the sale as a different way to offer to buy shares of a company you like at a lower price. Companies with a history of financial success, profits, and dividend payments to shareholders are strong candidates. Do the necessary research on stocks to determine if they fit the criteria of your investment portfolio. Find LEAPs for companies with a good balance sheet and a diverse portfolio of products or services. And remember, the option contract will need to be secured by cash or buying power, so factor that in when considering total return.
Would you feel more confident investing in LEAPs or shorter-term options contracts?
*This post has been updated from an original version, published in 2021.