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What are the pros and cons? Intending to hold long term
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Chris
16 Jul 2021
Owner and Writer at Tortoisemoney.com
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Off the top of my head:
Pros:
Less capital lockup - generally higher ROI
If deep ITM (high delta), it is a good surrogate for stock (sometimes referred to as stock replacement strategy).
Can operate a Poor Man's Covered Call against it to generate even larger returns (use with caution and only if you understand the mechanism).
Cons:
If market trades sideways or flat, you might not get the gains you desire and if the market falls over the next 2 years, you end up not having shares at the end of it and instead losing the entire premium.
Since the delta of your LEAPs are not =1, on the upside, your return will not be 1:1 with the stock. But of course, with less capital lockup, your ROI will be higher, so I guess this is not a real downside.
LEAPs on stocks/ETFs with low volume can lead to you being played by the market maker when you actually try to sell off your LEAPs. This may lead to unfavourable selling prices which may eat into your returns. This is especially so if the price of the underlying is tanking and you're trying to get out of it.