Strategy Source

Creator/Channel: Tom King

Published Date: Aug 1, 2023

Source: How I Trade LEAPs – The Beginners Guide to Profitable LEAP Trading

Trade Setup

This strategy revolves around selling naked put options with extremely long expiration cycles to maximize your probability of success while minimizing the daily buying power required.

Action (Sell (-)/Buy (+))	Leg	DTE	Strike Price / Delta Target	Width
Sell (-)	Put	~365	12 to 14 Delta	N/A (Naked)

• Total Capital Required: Varies by underlying. The target goal is to collect a premium credit equal to 25% to 30% of the buying power reduction. (Example from transcript: A -SPX375P requiring $3,737 in buying power to collect $633 in premium).
• Execution Context: The video showcases a live 2023 personal trading track record alongside a historical platform backtest.

Strategy Application

This is an income-generating, premium-selling strategy designed to pay you upfront while giving you an enormous runway to be right. Instead of selling standard 45-day options, this strategy pushes all the way out to LEAPS (Long-Term Equity Anticipation Securities) expiring in roughly a year.

• Targeting the Strike: The core mechanic relies on Delta (strike metric / directional bias or “probability of success”). You will look to sell puts at the 12 Delta mark. In higher volatility environments where premiums are richer, you can safely move up to the 14 Delta.
• The Buffer Zone: Selling options a year out at a 12 Delta creates a massive safety cushion. For example, if SPY is trading at $458, the 12 Delta put might sit all the way down at $375. This gives the market room to drop 18% before your strike is even tested.
• The Time Differential: While you are opening a trade with ~365 DTE, you are not holding it for a year. The goal is to let Theta (“time decay” mechanics) work its magic over a short window. The average time spent in this trade is just 30 to 40 days before cashing out.
• Market Environment: This trade is highly flexible. It thrives on broadly bullish, flat, or slightly bearish market behavior. To optimize entries, look at weekly charts for indices or high-quality mega-cap stocks (like AAPL) that are oversold on the RSI, crossing up on the MACD, or bouncing off weekly support levels.

Risk Profile

• Wing Widths: Not detailed in source transcript. This strategy relies entirely on naked short puts, meaning there is no long protective wing capping your downside.
• Assignment & Buying Power Risk: Because these are naked options, you carry the risk of being assigned 100 shares of the underlying stock if it crashes below your strike price. This strategy is highly margin-intensive and is best suited for a standard Reg T margin account or a Portfolio Margin (PM) account to keep buying power requirements low. Cash-secured accounts (like an IRA) will drastically drag down the return on capital.
• Capital Preservation Rules:
  • Max Risk Per Trade: Never risk more than 2% of your total portfolio value on a single position.
  • Max Strategy Allocation: Never allocate more than 30% of your available trading buying power to this strategy.
  • The “Laddering” Limit: For SPY, open exactly one new LEAP put every Monday. Cap the total number of open SPY positions at 10. If you hit 10 open trades without any closing for a profit, stop adding new ones.

Expected Outcome

1. The “Theta” Burn (Your Base Win)

The stock goes up, stays completely flat, or even drops moderately. Because you are so far out of the money and time is ticking away, the option loses value. You buy it back for cheaper than you sold it in about 30 to 40 days. The transcript cites a 97% win rate utilizing this zone.

2. The Assignment Trap (The Drawdown)

A black swan event or heavy correction drags the underlying stock down more than 18%, blowing past your buffer zone and threatening assignment.

Management & Exit Triggers

Having mechanical exits is critical since this is an undefined risk trade. Follow this hierarchy to manage the position:

• Primary Profit Target: Close the trade immediately when you hit a 30% winner (meaning you have captured 30% of the total initial credit received).
• Defensive Stop Loss: Close the trade for a 3X Stop. (This means if you collected $1.00, you buy it back at $3.00, resulting in a 2X net loss).
• Secondary Time Stop: In the extraordinarily rare event you are still holding the option near expiration, close it at 21 DTE to avoid Gamma (“accelerated risk near expiration”).
• Alternative Exit (Assignment): If you are trading SPY and the market crashes 20%, you can intentionally ignore the stop loss, take assignment of the shares at the heavy discount, and hold them long-term.