LEAPS Defensive Techniques

According to Hooper and Zalewski, in their book Covered Calls and LEAPS A Wealth Option, there are five defensive techniques to manage a LEAPS that has not sold for a profit.

1. SLR
2. Average down
3. Reposition
4. Close on delta
5. Roll out

The SLR or Surrogate LEAPS Replacement is used when 3 conditions exist:

1. An investor has sold a secondary call and the stock price has moved up, not allowing that call to be bought back for a profit.
2. The investor can sell the LEAPS for a 5 percent or better profit but is prevented from closing the transaction as doing so would result in an overall negative return due to the buyback cost of the call.
3. The stock is in the upper 75% of its current cycle.

Here's how to implement the SSR:

If the stock price is in the upper 75% of the cycle and you are able to sell the original LEAPS for a return of 5% or more, the SLR can be considered.

Select the same expiration date, move the strike price up one or two increments (preferably not equal to the strike price of the call) Buy this LEAPS and then immediately sell the LEAPS you own.

Two scenarios take place after you implement this:

1. Stock price continues up and you may be able to sell the LEAPS for a 5% profit and then buy another LEAPS.
2. Stock price declines and you may be able to buy back the call when you can exit a the cost you sold it for.