Can You Sell Covered Calls Against Leaps And How Can You Do It?
Can you sell covered calls against LEAPS? Yes, Selling covered calls against LEAPS can be a useful strategy for generating income, but it's important to be aware of the risks and limitations involved, as well as the factors that can impact the success of this strategy.
It's essential to do your research and seek the advice of a financial professional before making a decision.
A covered call is a popular options trading strategy that involves writing (selling) call options on a stock that you already own. The goal is to generate income from the option premiums while also potentially protecting your underlying stock position.
But what happens when the underlying stock is a long-term equity anticipation security (LEAP)? Can you sell covered calls against LEAPS and still enjoy the benefits of this options strategy?
What Are LEAPS?
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LEAPS are long-term options contracts that give the holder the right to buy or sell a stock at a predetermined price for a set period of time, typically ranging from 9 to 21 months. They are similar to traditional options, but with a longer expiration date.
LEAPS can be an attractive investment option for those looking to invest in a stock for the long term, as they provide the opportunity to benefit from the stock's price appreciation while also having the flexibility to sell the option if the stock's price doesn't move in the expected direction.
The SECRET to options trading: LEAPS and COVERED CALLS
How To Sell Covered Calls Against LEAPS?
It is possible to sell covered calls against LEAPS, but there are a few things to keep in mind. First, it's important to understand that LEAPS are typically more expensive than traditional options due to their longer expiration date. This means that you will need to own more LEAPS to generate the same level of income as you would from selling a covered call on a stock.
Additionally, when you sell a covered call against a LEAP, you are effectively capping your potential profits from the underlying stock.
This is because the option premium you receive from selling the covered call is paid upfront, and the call option will limit your ability to profit from any further stock price appreciation above the option's strike price.
Another important consideration when selling covered calls against LEAPS is the expiration date of the LEAPS. It's important to choose a LEAP with a expiration date that aligns with your investment goals.
If you are looking to hold onto the underlying stock for a long period of time, it may make sense to choose a LEAP with a longer expiration date. However, if you are more focused on generating short-term income, a LEAP with a shorter expiration date may be a better fit.
Another factor to consider is the option's strike price. When selling a covered call, it's important to choose a strike price that aligns with your investment thesis for the underlying stock.
For example, if you believe the stock will appreciate significantly in the near future, you may want to choose a strike price that is above the current stock price.
On the other hand, if you are more conservative in your investment approach, you may want to choose a strike price that is closer to the current stock price to reduce your risk.
Additionally, it's important to be mindful of market conditions and how they may impact the success of your covered call strategy.
For example, a bear market can put downward pressure on stock prices, making it more difficult to generate income from selling covered calls. On the other hand, a bull market can create more opportunities for profit, as stock prices tend to rise in a bull market.
Finally, it's important to be aware of any changes to the underlying stock or the company that could impact the value of your LEAPS and your covered call strategy.
For example, a dividend increase or a merger announcement could impact the value of your LEAPS, and it's important to be prepared to adjust your strategy accordingly.
Advantages And Disadvantages Of Selling Covered Calls Against LEAPS
One advantage of selling covered calls against LEAPS is that it can provide a steady stream of income. This can be especially useful for those who are looking to generate passive income from their investments.
Additionally, selling covered calls against LEAPS can help to offset some of the cost of purchasing the LEAPS, making them a more affordable investment option.
On the other hand, selling covered calls against LEAPS can also have some disadvantages. As mentioned earlier, it will cap your potential profits from the underlying stock.
Furthermore, if the stock's price doesn't move in the expected direction, you may end up losing money on both the LEAPS and the covered call.
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People Also Ask
Can You Sell Covered Calls Against LEAPS Options?
Yes, you can sell covered calls against LEAPS options, which are long-term options that provide exposure to a stock's price movement.
Is Selling Covered Calls Against LEAPS A Good Strategy?
Selling covered calls against LEAPS can be a good strategy for some investors as it can help generate income and potentially reduce risk. However, it is important to carefully consider the potential benefits and drawbacks of this strategy in the context of your individual investment goals and risk tolerance.
What Is The Risk Of Selling Covered Calls Against LEAPS?
The risk of selling covered calls against LEAPS is that the stock price may increase beyond the strike price of the call option, in which case the investor would miss out on potential profits from the stock's appreciation. Additionally, if the stock price decreases, the investor could incur losses on both the stock and the call option.
How Do I Sell Covered Calls Against LEAPS?
To sell covered calls against LEAPS, you need to first purchase a LEAPS option and then sell a call option at a higher strike price. The call option provides the buyer with the right to purchase the stock at the strike price, while the investor who sold the call option is obligated to sell the stock at the strike price if the option is exercised.
Conclusion
Can you sell covered calls against LEAPS? Yes, you can. Selling covered calls against LEAPS can be a useful options trading strategy.
However, it's important to understand the risks and limitations involved, as well as the factors that can impact the success of this strategy. As with any investment, it's essential to do your research, consider your risk tolerance, and seek the advice of a financial professional before making a decision.
About The Authors
Hilda Workman - Hilda Workman is a licensed financial advisor with years of expertise in the industry. She has assisted a range of clients, from sole proprietors to large corporations, in reaching their financial objectives. She is informed about many different financial subjects, including tax preparation, investment planning and also in fashion. She believes that the best things are those that are imperfect.