LEAP Call Strategies Comparison
What is LEAP?
The acronym LEAP stands for “Long-term Equity AnticiPation.”
What am I really comparing?
I’m not comparing the characteristics of these different LEAP call strategies, you can find all the definition and characteristics comparison in many sites out there. What I’m going to do is to compare some of the Greeks of these strategies in the LEAP scenario.
Since it's about LEAP, my comparison will mainly focus on far away expiry. In my scenario below, I will be using 180 DTE as the anchor DTE. And that's also the DTE I do for LEAP, specifically ranging 160-200. Shall not cover why in this article, if interested do subscribe. I may cover it next time.
6 Different LEAP Call Strategies
For all the examples, I will be setting the cost as near to $10,000 as I can, for later comparison. Let's start from the simplest to the more complex ones to the end.
OTM Long Call (15 Delta)
Buy 15 Delta Call
Vega = 2262
Theta = -78
Max Loss = $10,140
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $23,400 | 231% |
| 5% | $41,100 | 405% |
| 10% | $59,100 | 583% |
| 15% | $77,200 | 761% |
| 20% | $95,300 | 940% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$9,900 | -97.63% |
| 5% | -$8,200 | -80.87% |
| 10% | -$4,118 | -40.61% |
| 15% | $2,483 | 24.49% |
| 20% | $11,100 | 109.47% |
OTM Long Calls seems to get affected by Vega a lot. The P&L also scales the most. But take note this is a 2 months simulation out of 180 DTE. As the Theta is high, as it gets near the expiry it decays faster.
So it seems that it's good to enter ITM Long Call when you are very bullish and will exit on a quick wave up in 1-2 months. Do not hold on to it too long.
ATM Long Call (50 Delta)
Buy 50 Delta Call
Vega = 674
Theta = -30
Max Loss = $11,855
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $11,700 | 99% |
| 5% | $14,000 | 118% |
| 10% | $16,600 | 140% |
| 15% | $19,200 | 162% |
| 20% | $22,000 | 186% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$9,500 | -80% |
| 5% | -$7,700 | -65% |
| 10% | -$5,600 | -47% |
| 15% | -$3,300 | -28% |
| 20% | -$1,000 | -8% |
For ATM Long Call, it seems more balanced on most factors. Less Vega and more Theta than ITM Call as expected. Interesting enough because of the balanced characteristics, I don't seem to see any benefit trading ATM Long Call compared to the other options.
ITM Long Call (70 Delta)
Buy 70 Delta Call
Vega = 237
Theta = -13
Max Loss = $9,916
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $6,000 | 61% |
| 5% | $6,600 | 67% |
| 10% | $7,400 | 75% |
| 15% | $8,200 | 83% |
| 20% | $9,100 | 92% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$6,200 | -63% |
| 5% | -$5,200 | -52% |
| 10% | -$4,200 | -42% |
| 15% | -$3,200 | -32% |
| 20% | -$2,200 | -22% |
ITM Long Call has much lower Vega and Theta compared to OTM and ATM. So it has more intrinsic value, less extrinsic value. In other words, less decay.
So it's like the opposite of OTM, you can hold this all the way to near expiry. The downside is high debit upfront.
Synthetic Long Stock
Buy 50 Delta Call
Sell 50 Delta Put
Vega = 0.07
Theta = 1.42
Since a synthetic long stock is not a debit trade, it's using margin instead.
I will try to get 1 standard deviation close to $10,000 for reference.
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $8,800 | 100% |
| 5% | $8,800 | 100% |
| 10% | $8,800 | 100% |
| 15% | $8,800 | 100% |
| 20% | $8,800 | 100% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$8,800 | -100% |
| 5% | -$8,800 | -100% |
| 10% | -$8,800 | -100% |
| 15% | -$8,800 | -100% |
| 20% | -$8,800 | -100% |
A synthetic long stock is the closest to a stock replacement, with the exact same linear gain as stock movement. Just that it's leveraged by a lot using margin.
Protective Synthetic Long Stock
Buy 50 Delta Call
Sell 50 Delta Put
Buy 40 Delta Put
Vega = 391
Theta = -19
Frankly speaking I'm not sure what is the name of this, I just named it Protective Synthetic Long Stock because it's basically the same except adding 1 more leg on Buying 40 Delta Put. Another way to look at this is a Bull Put Spread with a Long Call.
This is a hybrid margin+debit setup. The idea is to use the credit from the BPS to partially finance the long call and reduce the Theta slightly.
Max Loss = $13,888
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $11,000 | 79% |
| 5% | $12,500 | 90% |
| 10% | $14,300 | 103% |
| 15% | $16,200 | 117% |
| 20% | $18,200 | 131% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$10,000 | -72% |
| 5% | -$8,200 | -59% |
| 10% | -$6,300 | -45% |
| 15% | -$4,300 | -31% |
| 20% | -$2,300 | -17% |
This trade involves both debit and margin. It's one of the hardest to manage among all.
ZEBRA Call
So ZEBRA stands for Zero Extrinsic Back Ratio, a term coined by Liz and Jenny in their TastyTrade show.
Buy 2 x 70 Delta Call
Sell 1 x 50 Delta Call
Vega = 101
Theta = -7
As ZEBRA tends to have higher debit requirements, I couldn't get close enough to $10,000 of max loss. The max loss for ZEBRA is actually the debit paid. In this example, the debit is $7,622. So just note the percentage for comparison instead.
Profit/Loss when Stock Price moved up 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | $3,800 | 38% |
| 5% | $3,900 | 39% |
| 10% | $4,200 | 42% |
| 15% | $4,500 | 45% |
| 20% | $4,800 | 48% |
Profit/Loss when Stock Price moved down 1 Standard Deviation in 2 months
| Volatility Step | P&L | P&L % |
| 0% | -$4,300 | -43% |
| 5% | -$3,600 | -36% |
| 10% | -$3,000 | -30% |
| 15% | -$2,500 | -25% |
| 20% | -$2,000 | -20% |
Just like the name of this strategy, it has almost zero extrinsic value. Almost no Theta to decay. This has even lower Theta than the ITM Long Call. It also has the lowest Vega, making it the most unaffected by volatility.
ZEBRA is the best if you want to hold very long DTE and not lose much on Theta. The only downside to this strategy is it has a high upfront debit.
Summary
OTM Long Call - Good for short term swing trading. Exit within 1/3 of the DTE.
ITM Long Call - Good for long term stock replacement using cash.
Synthetic Long Stock - Good for long term stock replacement using margin.
Protective Synthetic Long Stock - Good for long term stock replacement using both cash and margin. Suggest for advance traders only.
ZEBRA - Best for long term stock replacement using cash.
Hope putting all this information together helps, documenting this helps me get more concrete thoughts over the few leap calls strategies. If you find any mistakes or you have a better call strategy to discuss or share, feel free to email me. Do subscribe if you like to see more of such findings.