Have you ever considered using a LEAPS call option as the underlying in your covered call, instead of a stock? Learn more about this common strategy twist here – plus, suggest a name for this strategy for a chance to win a FREE Options Playbook from TradeKing. In my last post we explored a twist on the covered-call strategy, in which you substitute a high-delta LEAPS call option for stock as the underlying that “covers” the position. This can be a considerably less expensive way to write a covered call, often with a sweeter static-return on the trade.
If you’re not familiar, LEAPS stands for Long-Term Equity AnticiPation Security, a fancy name for what is essentially a long-term options contract. (You can really get up-to-speed by checking out my blog series on LEAPS.) Covered call selling (or “writing”) involves the sale of a call option against a corresponding stock position you already own – that position “covers” you in the event that you’re assigned and have to deliver stock. (If you’re a TradeKing client, this strategy is Play #6 in the Options Playbook in the Education menu.)
Of course, there are risks to keep in mind as well: LEAPS, unlike stock, eventually expires – and when they do, it’s possible that you could lose the entire value of your initial investment. You have to juggle more than one expiration date with this trade – that of the covered call you sell, plus that of the underlying. And it can be tricky to successfully manage an exit from the trade, should you get assigned and have to deliver the underlying stock. (A few other risks to keep in mind: multiple-leg options strategies involve additional risks and multiple commissions and may result in complex tax treatments. Consult with your tax advisor as to how taxes may affect the outcome of these strategies. When trading this or any other strategy, you should factor in expenses like commissions, fees, margin interest charges, and the like as you plan for the trade, in advance.)
The funny thing about this trade is that it’s fairly common – but it doesn’t have a name of its own. That’s why we decided to hold an informal contest: Give this options strategy a name, and we’ll include it in the 2nd edition of the Options Playbook – and send you a FREE copy.
Think of all the fame and glory you’ll get for naming your very own options play. Submit your names via comment or private message by Friday, 6/19, and we’ll announce a winner next week.
Thanks – looking forward to your ideas!
Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.
If your name for this options play is selected, TradeKing will notify you via email. A signed waiver is required to secure permission to use your name in the TradeKing Options Playbook (2nd edition). Email us at theoptionsguy@tradeking.com if you have any additional questions.
Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.
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