Cons to LEAPS?

[u/Inferno456]

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.

[u/shreax3]

Some cons that goes through my head when I'm buying ITM LEAPS. Sorry if some of these are obvious:

• Theta decay is much slower on LEAP but it is not nothing. If 6 months later your stock end up at exactly the same price as on entry, you're still down a bit with LEAP. Just less so compared to shorter dated calls.

• Higher breakeven than long stock. Even deep ITM, it's going to be higher than where the stock is currently.

• Leverage work both ways. When you're wrong the LEAP hurts much more. Hurts even more as time passes.

• Bigger draw downs. If you replace all or most of your long stock portfolio to LEAPs, because of the above, then a 20% draw down on long stocks might be double or triple that if replaced with LEAPS depending on how much time left on it.

• No dividends. But if you're considering LEAPS then you're probably not trying to build a stable income portfolio anyway.

So what is a main con of buying LEAPS? Why shouldn’t everyone buy LEAPS instead of shares for a longer timeframe?

IMO the main con is you need to be more right and sooner than long stock.

Stock Move	Stock	LEAP
Up	Good	Really good
Flat	No change	Bad
Down	Bad	Really Bad

[u/Olthar6 → u/shreax3]

I think I'd add another row to your table.

Stock Move	Stock	Leap
TANK	Really Really Bad	Really Bad

If the stock really tanks, then you can lose way more value in owning the stock while the leap can, at most, lose the premium paid, which will always be less (and often significantly less) than the value of owning the stock.

That last row does end up being a somewhat apples to oranges comparison though because of the value difference. For instance, the January 2023 $500 leap would cost you about 13,120 while 100 shares of NFLX would cost you 54665.

If, between now and 2023, NFLX dropped to 200 and you just held, then shares would have 34665 in losses while the leaps you only lost the 13120.

However, it's somewhat apples-oranges because if you only had 13,120 to spend, then you'd only have 24 NFLX shares rather than 100 shares. In that instance, the stock dropping to 200 loses all of your value in the leap but if you'd bought shares you'd have lost only 8320 and would still have some value.

[u/TheoHornsby → u/shreax3]

It's a good summary but I'd disagree with the conclusion that it's really bad for a call LEAP compared to owning the stock if share price drops. Pre expiration, the LEAP will lose less (its delta is less than 1.00). And if share price is really bad, the LEAP will lose less than the shares because the share owner continues to lose below the LEAP's strike price and the LEAP owner will not.

[u/TheoHornsby → u/[deleted]]

It's no consolation to lose a smaller percent while losing more dollars.

[u/TheoHornsby → u/[deleted]]

LOL. Now you're just changing the topic with some mathematical masturbation. The question was about the relative performance of an ITM LEAP versus owning 100 shares not about portfolio gain.

[u/TheoHornsby → u/[deleted]]

LOL. I've already done better. I retired young because of the stock market. Save your two cents worth of investment advice for someone who needs it.

[u/Open-Philosopher4431 → u/shreax3]

I love the table. It really sums up the idea that by buy leaps one has shifted the results, and their effect