Repositioning a LEAPS

Hooper and Zalewski detail how to manage a LEAPS that has not sold for profit in their book, Covered Calls and LEAPS a Wealth Option. Here are two of the techniques:

Repositioning a LEAPS

In order to generate a 10% minimum return you occasionally have to sell a call with a strike price less than the LEAPS. If this is the case, you should reposition your LEAPS. This simply means selling the LEAPS you currently own and purchasing a LEAPS with the same expiration one or two strike prices deeper in the money. Try not to violate the $10.00 adjusted cost rule ... if you do, will be more difficult to manage the call position.

Repositioning has the effect of creating more management depth.

Rolling Out

Rolling out ensures that you keep time decay in your LEAPS at a minimum by ensuring that there is always at least one year of time value left in the LEAPS.

If the LEAPS has less than one year to expiration, follow these guidelines to roll out:

1. It must be conducted on a down day.
2. If it allows, select the same strike price and the furthest out date possible providing that the adjusted cost does not exceed $10.00.
3. If this LEAPS leads to an adjusted cost of more than $10.00, select the next highest strike price. Continue to raise the strike until the adjusted cost does not exceed $10.00.

Adjusted cost is a measure of the new cost of your LEAPS after you have rolled out.

Adjusted cost = cost of original - sell price of original + cost of new LEAPS