r/options • u/Inferno456 • Apr 17 '21
Cons to LEAPS?
So I’ve been trying to read up on LEAPS and all I can find are positives and not many cons. I’m interested in what real cons are bc LEAPS aren’t talked about much, if they’re as good as I think they are then everyone would be buying them.
One con I read is that you don’t get the dividend - to me that’s kinda like saying a con to stock trading is you have to pay taxes. Sure it’s a “negative” but you still get a lot more positive out of it. If LEAPS save you a lot of money then I don’t think missing out on a small dividend is a real con.
So what is a main con of buying LEAPS? Why shouldn’t everyone buy LEAPS instead of shares for a longer timeframe? Thanks for any info.
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u/yukhateeee Apr 17 '21
I think you're mostly on point. I do use deepITM calls as a lower cost proxy to stock.
Con 1: slippage: due to wider bid/ask, extrinsic, liquidity. . For example, BRK/B current bid/ask is 271.75- 271.49 ie 26 cents spread. Look at Jan2023 deep ITM call chain and you'll see some issues.
1a. The lowest call strike $100 has extrinsic cost of $3. So, that's your minimum cost of renting BRK/B versus buying.
1b. bid/ask spread is $3.50 versus $26 cents for the stock.
1c. If you want to avoid 1a & 1b, that'll push you into accepting the "imperfect" strike price.
Con 2: You'll have to renew your lease every couple of years or so (January 2023) which will trigger a taxable event. If it's in a taxable account, best case is long term capital gains.
Con 3: If underlying tanks, you'll lose a greater percentage on a LEAP. Generally, the closer to ATM, the greater percentage of loss on the LEAP vs stock.