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Buying LEAPS for great returns

Last year, my portfolio gained 400%. But, again, it was stocks and options contributing to such great returns. And LEAPS calls were among those options that contributed significantly.

What inspired me to trading LEAPS?

I was always interested in leveraging my portfolio. And I was always thinking about how to achieve high income faster to be reinvested to grow my portfolio. Finally, in 2021, I believe I will accomplish that goal. I hope I will be able to repeat it in 2022, too, although the start of the year wasn’t perfect so far.

In my hunt for fast and increased returns than what the standard investments offer I came across a book by Ian Ayres and Barry Nalebuff “Lifecycle Investing“. It is a great book about leveraging portfolios. The authors look at leveraging over the entire lifespan of an investor. It is interesting, but there was one thing I liked the most.

The first chapter starts with a story of Andrew Verstein, a law school student, who in January 2009 (in the middle of a financial crisis) did something everyone would be scared to death to do: he bought SPY LEAPS using all his savings. Three years later, his investment turned into $17,600 turning his $4,770 into $12,830 profit (269% return, or 89% annualized return).

Even today, if you bought SPY LEAPS in January 2019, you would get similar returns by December 2021:

LEAPS backtest

What LEAPS to trade?

Heureka! This is what I was looking for! Free money! I realized that this was the right vehicle for me. But I also learned that I can trade LEAPS against indexes only. Why?

The index will likely go up over time!

The index offers up to 4 years of LEAPS. It is almost guaranteed to have the index up. See the backtest above, I gained great returns even during the volatile 2019 year and 2020 covid slump. Four years is a long enough time to give SPY time to grow. Stocks do not offer that benefit.

The index will go up for sure. If you do not believe me, look at any index chart. Stocks may have a bad year and lose value. They can stay down for a very long time. Just look at BABA.


Your LEAPS would be worthless today.

Managing the LEAPS

To wrap it up: I buy at the money LEAPS against indexes and hold them for their entire lifespan. Sometimes, I sell covered calls against those LEAPS (but in 2020 and 2021 it was tricky selling the calls as the market was relentlessly rallying and I had to continuously roll, very frustrating).

Then, 90 days to expiration, I roll, now in the money, LEAPS back up to “at the money and 700+ days to expiration. That way I cash out my profits and start with a new cycle.

And in the meantime, I ignore all the noise at Wall Street, all the media hysteria, and investors’ digestions of all sorts of fears…

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