Tutorial: Option Call LEAPS

Introduction

In this post, we will explore using FDscanner to find cheap, far OTM option Call LEAPS. Here, we define LEAPS as options having greater than 12 months expiry. By far OTM, we mean >90% OTM.

Many may think it’s pure speculation to bet on stock price almost doubling in a year. We agree speculation is most likely the way most retail traders uses far OTM LEAPS, but that’s not the only way to use them.

Let’s start with setting the scanner to find such options.

Option Scanner Setup

Head to the option scanner and set the following. Ensure it looks like the image below

  • Expiry: Jan 2022
  • % OTM: 85% – 99%
  • Option Price/Strike Price: 0% – 0.5%
  • Option Type: Calls Only

Results (Top 40)

A total of 45 options passed the filter. It’s likely the number of options that passed the filter exceeds 100, because our scanner can only pick up options with at least 1 volume. You may wish to check out this scan end of day for a few days, new companies might pop up. Alternatively run a similar scan for 50% OTM Leaps with a higher Option Price/Strike price.

Use Case 1: Upside Protection for Wheeling Stocks

Imagine you’re wheeling a promising stock. There’s always a chance the stock blows up 40% in a month (happened to me with LTHM), and it might never drop back to the range where you were wheeling before.

Here’s where these cheap LEAPS come in. At such low prices of 0.2% – 0.5% of strike price, a weekly 0.3-0.4 delta covered call or short put typically pays for one of these 90% OTM Call LEAPS with change to spare, and these are valid for another 15 months.

If you short 5x 0.4 delta puts, you could consider spending half of it in 3x 95% OTM 2022 LEAPS.

These LEAPS gives you the peace of mind that some upside is captured even on extreme upward movement. It’s especially great combined with deep value stocks or cyclical industrials stocks. 

Use Case 2: Speculative Bets on Positive Black Swans

Let’s say it costs 0.2% of current stock price for a 95% OTM Jan 2022 LEAP. If the stock price goes up 110%, the option will be a 75x bagger. (15% intrinsic/0.2% paid).

It’s then up to you to find companies with greater than 1 in 75 chance of going up 110% in 15 months. Try to think of industries or companies in these categories with potential positive black swans

  • Heavily beaten down deep value companies
  • Stock with high short interest
  • Pharma companies
  • Potential acquisition targets
  • Companies with upcoming major product launch
  • Industry disrupter that’s underappreciated

Conclusion

The takeaway point is, try to look for underpriced LEAPS. Especially in boring value companies that’s overlooked by most.

Paying 10% for a 95% OTM LEAP on a hot stock like TSLA is not the way. In such cases, do a covered call instead and modify the scanner to find the most expensive LEAPS. 

Leave a Comment

Your email address will not be published. Required fields are marked *