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.

free exclusive value investing with options report

HOME : LEAPS Option Strategies : Constructing the LEAPS Perpetual Income Strategy


Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares

Open Market Purchase Price: $20,071.83

Less Booked Option Income: $16,341.71

Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%