One way to trade weekly options that could be considered ‘less risky’ – at least when compared to other similar ways of trading – is to go out and purchase a LEAP option – use that as the foundation for the trade – then start to sell weekly options against it – similar to how one might trade a covered call trade.
Some option traders and investors call this sort of options trading method a covered write – or a synthetic covered call – and while they are correct that’re similar except for the simple fact that with this particular trading method the required margin – or upfront invested capital can be much, much less. When you’re using stock for this type of strategy, you must invest the whole amount to buy the underlying stock which can be a significant investment. But if you are simply using options – either regular options or the much longer dated options such as LEAP options – your upfront investment can be much less.
Trading LEAPS along with Weekly Options
When you break the word LEAPS down you find that it stands for: ‘long-term equity anticipation securities’. These trading vehicles can have life spans from a couple of months to many months and in some cases even years. Another interesting point regarding these particular trading vehicles is that in actuality they are not even ‘options’ – but in fact they are actually ‘securities’.
One way to think of LEAPS is to think of them as leasing options rather than purchasing them. When you are using LEAPS you can benefit from the movement in stocks in a similar way as if you owned the stock – only without having to put out as much money and with more more leverage.
AAPL Example
Let’s imagine a scenario where trader A wishes to take up a new long position in the stock AAPL – the only problem is that he doesn’t have the amount of cash needed to purchase the stock as it is so expensive. An alternative for trader A is to instead of purchasing the stock – just buy several long LEAP call options for far less money than what it would have cost him to buy the stock – yet he still is able to profit from a move in AAPL – and if purchased correctly, he could profit just as much as if he had the stock and perhaps even more.
Another potential scenario is buy the LEAP as in the example above – but then to use the LEAPS in conjunction with weekly options – using the LEAP as a ‘stock replacer’ – and essentially building an option trading position that is very much like a covered call trade. In this type of a set up, the LEAP position would act as the long (or short) stock – and then the trader would begin to sell weekly options against the LEAP position – and this could potentially be done many times in a row – up to 52 times in the year – all the while pumping out cash flow from the sold weekly options. What is even better with this scenario becomes apparent when you compare what you could make with a similar ‘stock based’ covered call play versus this type of LEAP surrogate stock weekly options trade – where the returns on the LEAP version is far, far better than the possible returns with the stock based scenario.
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