Why LEAPs Are a One-Way Ticket to Getting Screwed

Look, you wanna really get me going? 

Start talking about LEAPs. Long-term equity anticipation securities. Don't even get me started on LEAPs. I hate LEAPs.

Actually, scratch that - I'm already started, so let's do this.

Anybody that actually uses LEAPs doesn't know what the beep they're even doing in this business. I guarantee that. And some people, they'll talk about LEAPs and they'll give you strategies with LEAPs because they're "retail friendly."

But I'm actually going to give it to you straight from someone who's seen how this game really works.

"Price It Higher, You Dummy"

Here's what nobody tells you about LEAPs: retail traders don't sell them. They only buy them. Think about it - if you sold a LEAP, you'd be tied up for over a year. You are a madman if you do that.

I learned this lesson early in my career when one of the senior guys I worked with pulled me aside. 

I was trying to price some LEAPs fairly, and he looks at me and says: "You price it higher, you dummy. Nobody ever sells 'em. They only buy 'em."

I had no idea what the hell he was talking about at 22 years old. But it makes perfect sense now.

If you know that somebody's only ever going to be a buyer, it's not a fair marketplace. Market making firms skew the pricing because they know you're coming in one direction only. The implied volatility is jacked up, the cost of carry is built right in, and you're getting screwed before you even place the trade.

The Real Cost Nobody Talks About

Want to know how toxic LEAPs really are? When the trading group I worked with left the floor, we had all these LEAPs left over on our books. We had to pay tens of thousands of dollars to get somebody to take our LEAPs off our hands.

Read that again: We had to PAY someone tens of thousands to take them.

Because nobody wants that pile of crap on their books. Nobody wants to be stuck with LEAPs for over a year, watching time decay eat away while being massively exposed to any move that could happen.

Stop Falling for "Retail Friendly"

LEAPs are marketed as "retail friendly" because they sound sophisticated and long-term focused. But that's exactly the problem - when something is designed to be "retail friendly," you should ask yourself: friendly to who?

Because it's sure as hell not friendly to your P&L.

There are plenty of ways to get longer-term exposure without walking into a rigged game.

Tomorrow morning I'll be live at market open showing you what actual professional traders use instead of LEAPs. 

While everyone else is getting screwed on overpriced long-term options, we'll be talking about strategies that actually work when you understand how this marketplace really operates.

Because the last thing you want is to be the guy holding LEAPs when the music stops.

To your success,

Don Kaufman