How to Use LEAPS for Long Term Leverage
LEAPS are long-term option contracts that allow traders to gain leveraged exposure to assets they believe will appreciate significantly over time, despite potential short-term volatility. The speaker explains that LEAPS have no strict definition—they're simply options with extended expiration dates that suit longer-term investment theses.
Summary
The transcript discusses LEAPS (Long-term Equity AnticiPation Securities) as a trading tool for long-term leverage. The speaker clarifies that LEAPS are not a distinct category with a hard definition, but rather option contracts with longer time frames until expiration. Using Amazon as an example, the speaker illustrates the use case: an investor might believe Amazon is significantly undervalued with substantial long-term growth potential, yet recognize that the stock could experience substantial short-term declines of 55%, 32%, 23%, or 13%. In this scenario, rather than trying to time short-term movements, a trader would purchase a LEAP—essentially buying the right to purchase shares at a set price for an extended period (one and a half to two years, for example). This strategy allows traders to gain extreme leverage on their conviction in a company's long-term appreciation while sidestepping the difficulty of predicting short-term price movements. The speaker emphasizes that the distinction between a LEAP and a standard option is merely the time frame, with options ranging from one-day expirations to two-year expirations, all serving different time horizons for trade execution.
Key Insights
- The speaker claims there is no objective line in the sand that defines a LEAP versus a regular option—the distinction is purely based on the time frame until expiration
- The speaker argues that LEAPS are useful when a trader believes strongly in long-term appreciation but acknowledges unpredictable short-term volatility that could result in drops of 13% to 55%
- The speaker states that LEAPS function as a method to gain extreme leverage on a multi-year conviction thesis without needing to predict intermediate price movements
- The speaker explains that a LEAP is fundamentally just an extended purchase right—granting the ability to buy shares at a fixed price over a much longer timeframe than typical options
- The speaker notes that option expiration dates span a spectrum from one day to two years, with the time frame simply matching the trader's intended holding period
Topics
Transcript
[0:00] What are the pros and cons to LEAPS and do you use them? Yeah, I use them all the time. There's no there's no like there's no like line in the sand where something is a LEAP and something is not. A LEAP is just a an option contract that doesn't expire for a long time. And so when you're looking at a potential trade, like let's say you're looking at uh Amazon and you're saying, okay, well, I think Amazon is incredibly undervalued. I think its growth potential is out of this world. But in the short term, Amazon can, you know, have a 55% drop. Amazon can have a 32% [0:32] drop. Amazon can have a 23%…
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