Constructing a LEAPS Position

Okay, here is how Hooper and Zalewski tell you how to construct a LEAPS position in their book Covered Calls and LEAPS a Wealth Option. I highly recommend you purchase this book if you are serious about generating cash flow into your income column and reaching financial independence.

Selecting a LEAPS

• Select a LEAPS that is one strike in the money.
• Do not select a LEAPS that is more than $10.00 in price. This will create leverage for you and let you manage the position better in the event of a market downturn.
• The LEAPS selected must have a minimum 12 months to expiration with preference given to the longest-term available.

Selecting the Call

• Sell a call as soon as you buy the LEAP. Hesitation is for the weak and the speculator.
• Select a call that results in a positive called return ... you can find this by adding the cost of the LEAPS to the LEAPS strike price. This will give you the approximate strike price of the call.
• The call expiration cannot be equal to the LEAPS expiration.
• The combine delta ratio of the LEAP and call must be 1.90 or more. This will allow you to potentially close out on the delta effect. (this is the rate of change of the option price with respect to the underlying stock. At a 1.9, the LEAPS price will increase much faster than the cost of buying back the call.

The Delta equation in this context is as follows:

Delta ratio = LEAPS delta/Call delta

In order to complete the construction, use Hooper and Zalewski's propreitary screener located at www.compoundstockearnings.com, ensure the underlying stock position is an overall or current upward or horizontal cycle and that it meets the buying low rule.