Universal Investment Strategies Blog: How to Trade for A Living!

How does someone go from just $8 in their pocket to producing 7 figure income in their personal account?
It’s an amazing story but it all boils down to one simple concept:

Doing the opposite of what everyone else is doing.
In this case, it’s his dynamic strategy for selling options (the right way). We call it the Fig Leaf!

You see, most traders buy options and lose money.
And, even the ones who sell options can’t make it work…

But, you’re in luck! Read below as we breakdown one of our unique strategies.

Fig Leaf aka Leveraged Covered Call or Leaps Diagonal Spread

Buying the Leaps gives you the right to buy the stock at strike A mentioned below Selling the call at strike B mentioned below and obligates you to sell the stock at that strike price if you’re assigned.

This strategy acts like a covered call but uses the LEAPS call as a surrogate for owning the stock. Though the two plays are similar, managing options with two different expiration dates makes a leveraged covered call a little trickier to run than a regular covered call.

The goal here is to purchase a LEAPS call that will see price changes similar to the stock. So look for a call with a delta of .80 or more. As a starting point, when searching for an appropriate delta, check options that are at least 20% in-the-money. But for a particularly volatile stock, you may need to go deeper in the money to find the delta you’re looking for.

Some investors favor this strategy over a covered call because you don’t have to put up all the capital to buy the stock. That means the premium you receive for selling the call will represent a higher percentage of your initial investment than if you bought the stock outright. In other words, the potential return is leveraged.

Of course, there are additional risks to keep in mind as well: LEAPS, unlike stock, eventually expire. And when they do, it’s possible that you could lose the entire value of your initial investment.

Unlike a covered call (where you typically wouldn’t mind being assigned on the short option), when running a fig leaf you don’t want to be assigned on the short call because you don’t actually own the stock yet. You only own the right to buy the stock at strike A.

You wouldn’t want to exercise the long LEAPS call to buy the stock because of all the time value you’d give up. Instead, you hope your short call will expire out of the money so you can sell another, and then another, and then another until the long LEAPS call expires.

Some investors choose to run this strategy on an expensive stock that they would like to trade, but don’t want to spend the capital to buy at least 100 shares.

If the stock price exceeds the strike price of the short option before expiration, you might want to consider closing out the entire position. If the strategy was implemented correctly, you should see a profit in such a case.

If you do get assigned on the short call, don’t make the mistake of exercising the LEAPS call. Sell the LEAPS call on the open market so you’ll capture the time value (if there’s any remaining) along with the intrinsic value. Simultaneously buy the stock to cover your newly created short stock position. This is a situation when it pays to have a broker who really understands options. So give us a call at Ally Invest and we’ll help you through the process.