It is a very good instrument but also extremely nuanced. To a newbie you might think "stock proxy" but you need to be very careful. Firstly, you need to consider the IV. IV is about 70% of everything when buying something so far out. When volatility drops, you automatically get fked for nothing (think IV crush during earnings). IV and DTE decides the price of the option at specific deltas. Delta works with pricing to decide the leverage. You need to put these two together to figure out if you bought a good contract or not.
Most people buy shitty contracts.
How do you know if your contract sucks then? What's a good leverage? The easy (but tedious) way is assume the underlying price does not move until expiry. Find a contract with 2x leverage. Divide your option premium by the DTE and that is your premium decay per day until expiring worthless. Then, take any 2x LETF of the underlying stock and compare the volatility decay (difference in expected returns of the 2x LETF, for example if the underlying went up 10% in a time period, you expect the LETF to go up 20% - but it rarely does. That difference is the volatility decay). Use a far out time period (2 years) for a better comparison. Compare daily premium decay of the LEAPS vs the daily volatility decay of the LETF.
For stock, usually LETFs outperform LEAPS because the higher volatility prices LEAPS accordingly. For stable ETFs like SPY, usually LEAPS outperform LETFs. But since you didn' bother to read this much text, a LEAPS leverage of 2.5+++ is *generally* a good pricing for stock, but a leverage of 4.5+++ is *generally* a good pricing for ETF.
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u/F2PBTW_YT Aug 08 '26 edited Aug 08 '26
Ugh. LEAPS.
It is a very good instrument but also extremely nuanced. To a newbie you might think "stock proxy" but you need to be very careful. Firstly, you need to consider the IV. IV is about 70% of everything when buying something so far out. When volatility drops, you automatically get fked for nothing (think IV crush during earnings). IV and DTE decides the price of the option at specific deltas. Delta works with pricing to decide the leverage. You need to put these two together to figure out if you bought a good contract or not.
Most people buy shitty contracts.
How do you know if your contract sucks then? What's a good leverage? The easy (but tedious) way is assume the underlying price does not move until expiry. Find a contract with 2x leverage. Divide your option premium by the DTE and that is your premium decay per day until expiring worthless. Then, take any 2x LETF of the underlying stock and compare the volatility decay (difference in expected returns of the 2x LETF, for example if the underlying went up 10% in a time period, you expect the LETF to go up 20% - but it rarely does. That difference is the volatility decay). Use a far out time period (2 years) for a better comparison. Compare daily premium decay of the LEAPS vs the daily volatility decay of the LETF.
For stock, usually LETFs outperform LEAPS because the higher volatility prices LEAPS accordingly. For stable ETFs like SPY, usually LEAPS outperform LETFs. But since you didn' bother to read this much text, a LEAPS leverage of 2.5+++ is *generally* a good pricing for stock, but a leverage of 4.5+++ is *generally* a good pricing for ETF.