How to Use LEAPS Covered Calls to Generate Cash Today

LEAPS covered calls are much like other stock covered call options that investors are able to use to create hard cash earnings within their stock brokerage accounts, however with one significant distinction. The difference is that LEAPS, or Long Term Equity AnticiPation Securities, have got expiration dates longer than one year. An illustration may help to clarify how you can use LEAPS covered calls for your benefit.

For starters, if you are not really acquainted with trading options, a call option provides the buyer the right, but not the requirement, to buy a pre-determined quantity of an asset, usually a stock or commodity, at the specified price (strike price), on or ahead of the expiration date belonging to the option contract. A covered call option is simply a standard call option where the seller is actually protecting the contract with investments that are currently possessed inside their brokerage account.

LEAPS covered calls are standardized call option contracts having expiration dates more than one year away, that are guaranteed by the shares of stock that are now held in the sellers stock investing account. Since every LEAP option contract represents 100 shares of stock, these kinds of covered options can only be sold (also called writing a call option) based on full 100 share batches of the underlying stock that the option is being written against. As an example, if the investor owns 200 shares of General Electric (GE) inside their brokerage account, they could write (or sell) 2 LEAPS covered calls.

The lengthier expiration dates which LEAPS possess provide long term investors a chance to get exposure to long-term price variations, without requirement for a combination of shorter-term option contracts. Furthermore, the premiums (price) regarding LEAPS are usually higher than for standard options in the identical stock as the bigger expiration date gives the underlying stock more time to create a substantial price move and for the investors to make a good gain. Alternatively, for the investor writing LEAPS covered calls, these people get a greater cash payment up front for taking on the associated risk that they might be called out of their stock over the longer time frame contained in the covered LEAP contract.

One other attribute an investor considering writing LEAPS covered calls must evaluate would be that the price decay of a LEAP call option is a lot slower in comparison with an option with a much nearer term expiration date. For instance, if a call option having a strike price equal to the underlying stocks current price has only a month to expiration, and the underlying stock price remains flat, the price of the call option will certainly decrease to practically nothing over the final month of the contract. Nevertheless, a leap contract will register a very nominal reduction in price over the same month, because of it's longer time to expiration. 

Learn more about LEAPS covered calls. 

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