Constructing the LEAPS Perpetual Income Strategy

The LEAPS Perpetual Income Strategy is the customized LEAPS based income strategy that I teach and demonstrate inside The Leveraged Investing Club (and trade in my personal account).

It's an ambitious strategy, to be sure. It's engineered so that:

  • It doesn't matter where the underlying stock itself trades - up, down, sideways, back and forth, whatever. It can trade to the moon or it can crash down to zero. Since we don't care, we don't have to waste any time or stress out at all trying to guess what the underlying stock is going to do next
  • Our trades also require very little maintenance, incurs very little risk, and still steadily pumps out real income (tip: it's pretty sad, but you need to start from a place of skepticism when you hear anyone talking about option income until you know for a fact that they're using phrases like "cash income" or "instant income" to mask or distract from larger capital losses elsewhere on the portions of the trade they're not telling you about)
  • The trades themselves are simple enough to understand, but not so simple that it will ever appeal to lazy or crowd-following investors who we get to - humbly, of course - look down upon

But before we get into the specific details of how to construct the LEAPS Perpetual Income Strategy, it might be helpful to do a quick LEAPS review.



LEAPS Options Recap

To review . . .

>> LEAPS are basically options that don't expire for a long time (you can learn more about them here)

>> If you understand covered calls, you already have the foundation in place for calendar spreads

>> Instead of writing covered calls against shares of stock, you can use LEAPS as a proxy and write near dated call options against them

>> You're not limited to calls, however - in fact, you can set up the trade with either call LEAPS or put LEAPS

>> There's a huge leverage advantage with calendar spreads since you control a ton more shares through LEAPS vs. owning the shares outright

>> Example #1: 41.84% returns on a series of KO calendar spreads over 357 days

>> Example #2: 15.93% gains on another KO calendar spread trade in just 26 days (and a whopping 50.99% potential with a more aggressive set up)

>> There's a challenging balancing act with LEAPS calendar spreads

>> Risk #1 - Sell near dated options against the LEAPS for income but risk missing out on big cap gains if the underlying stock makes a favorable move

>> Risk #2 - Don't sell near dated options and watch your unhedged LEAPS get gutted if the underlying stock makes an unfavorable move



How to Construct the LEAPS Perpetual Income Strategy

The LEAPS Perpetual Income Strategy takes a unique approach.

It totally eliminates the impact that the underlying share price has on the value of the LEAPS.

So there's no risk to the downside - or capital gains upside for that matter.

How is that possible?

It's possible because I'm buying both deep in the money long call LEAPS and deep in the money long put LEAPS.

On an intrinsic value basis, the overall long portion of the trade is completely hedged. The long call LEAPS and the long put LEAPS offset each other.

So if the puts lose intrinsic value, the calls gain an equal and offsetting amount of intrinsic value.

And vice versa.

Intrinsic value is simply the measurement of the relationship between an option's strike price and the current value of the underlying stock.

>> A call option with a $30 strike on a $40 stock has $10/contract of intrinsic value

>> A put option with a $50 strike on that same $40 stock also has $10/contract of intrinsic value

>> Calls with strikes @ $40 and higher, and puts with strikes @ $40 and lower, in this example, have no intrinsic value whatsoever

We also strive to keep extrinsic or time value as small as possible by buying deep in the money LEAPS - because extrinsic/time value WILL eventually zero out and we'll need to recoup that amount to avoid losing money at the end of the day.

Next let's look at how we manage the LEAPS Perpetual Income Strategy, and how we actually make money from the trade.









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>> The Complete Guide to Selling Puts (Best Put Selling Resource on the Web)



>> Constructing Multiple Lines of Defense Into Your Put Selling Trades (How to Safely Sell Options for High Yield Income in Any Market Environment)



Option Trading and Duration Series

Part 1 >> Best Durations When Buying or Selling Options (Updated Article)

Part 2 >> The Sweet Spot Expiration Date When Selling Options

Part 3 >> Pros and Cons of Selling Weekly Options



>> Comprehensive Guide to Selling Puts on Margin



Selling Puts and Earnings Series

>> Why Bear Markets Don't Matter When You Own a Great Business (Updated Article)

Part 1 >> Selling Puts Into Earnings

Part 2 >> How to Use Earnings to Manage and Repair a Short Put Trade

Part 3 >> Selling Puts and the Earnings Calendar (Weird but Important Tip)



Mastering the Psychology of the Stock Market Series

Part 1 >> Myth of Efficient Market Hypothesis

Part 2 >> Myth of Smart Money

Part 3 >> Psychology of Secular Bull and Bear Markets

Part 4 >> How to Know When a Stock Bubble is About to Pop