Investing in the stock market can be a powerful way to grow your wealth, and for those with a long-term vision, Long-Term Equity AnticiPation Securities (LEAPS) can be an intriguing tool. If you're looking to leverage your capital and gain significant exposure to a company's potential growth over several years, then LEAPS on E*TRADE might be exactly what you're looking for.
Ready to dive into the world of long-term options? Let's get started!
What are LEAPS?
Before we jump into the "how-to," let's quickly clarify what LEAPS are. Simply put, LEAPS are options contracts with a much longer expiration period than standard options, typically ranging from one to three years out. They behave just like regular call or put options but give you a significantly extended timeframe for the underlying asset to move in your favor. This extended duration reduces the impact of time decay (theta), which is a major factor in shorter-term options.
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| How To Buy Leaps On Etrade |
Why Consider LEAPS on E*TRADE?
E*TRADE is a popular brokerage platform known for its robust trading tools, research resources, and user-friendly interface. It's a solid choice for options traders, including those interested in LEAPS. The platform offers:
Comprehensive Research: E*TRADE provides a wealth of data, news, and analyst reports to help you identify potential LEAPS opportunities.
Advanced Trading Tools: From options chains to strategy builders, E*TRADE equips you with the necessary tools for analyzing and executing your trades.
Educational Resources: They offer extensive educational content to help you understand options trading, including LEAPS.
Now, let's walk through the steps to buy LEAPS on E*TRADE.
Step 1: Ensure Your E*TRADE Account is Options-Approved
Before you can even think about buying LEAPS, you need to make sure your ETRADE account is approved for options trading. This isn't an automatic feature; it requires an application process where ETRADE assesses your financial situation, investment experience, and risk tolerance.
Sub-heading: Checking Your Options Approval Level
Log In to Your E*TRADE Account: Go to the E*TRADE website or open their mobile app and log in with your credentials.
Navigate to Account Settings or Customer Service: Look for sections like "Account Services," "Customer Service," or "My Profile."
Find Options Trading: Within these sections, there should be a dedicated area for "Options Trading" or "Trading Permissions." Here, you'll see your current options approval level.
Generally, for buying LEAPS calls or puts, you'll need at least Level 1 or Level 2 options approval. Level 1 typically allows for covered calls, and long calls/puts, while Level 2 often includes strategies like spreads. Naked options (selling calls or puts without owning the underlying asset) typically require higher approval levels (Level 3 or 4) due to their unlimited risk potential.
Apply for a Higher Level (If Needed): If your current level doesn't permit buying LEAPS, you'll see an option to apply for a higher approval level. Be prepared to answer questions about your:
Investment Objectives: (e.g., capital preservation, income, growth, speculation)
Trading Experience: (how long you've traded, types of securities, general investing knowledge)
Financial Situation: (annual income, liquid net worth, total net worth, employment status)
Be honest and thorough in your application. Misrepresenting your experience or financial standing can lead to issues down the line. E*TRADE needs this information to ensure you understand the risks involved.
Step 2: Thorough Research and Identifying the Underlying Asset
Tip: Use this post as a starting point for exploration.
This is perhaps the most critical step. Buying LEAPS is a long-term commitment, so your conviction in the underlying company or index needs to be strong.
Sub-heading: What to Research for LEAPS Candidates
Fundamental Analysis:
Company Health: Look at earnings reports, revenue growth, profit margins, debt levels, and cash flow. Is the company financially sound and growing?
Industry Outlook: Is the industry the company operates in expected to grow? Are there significant headwinds or tailwinds?
Competitive Landscape: How does the company stack up against its competitors? Does it have a sustainable competitive advantage (moat)?
Management Team: Do you trust the leadership? Do they have a clear vision and a track record of execution?
Long-Term Growth Catalysts: What are the specific reasons you believe this stock will perform well over the next 1-3 years? This could be:
New product launches
Market expansion
Technological breakthroughs
Industry consolidation
Avoid chasing fads or short-term hype. LEAPS are for patient investors.
E*TRADE's Research Tools:
Stock Research: Use E*TRADE's stock screener to filter for companies based on your criteria. Explore their detailed company profiles, news feeds, and analyst ratings.
Options Screener: E*TRADE may have an options screener that allows you to specifically look for LEAPS (options with longer expiration dates).
Technical Analysis (Optional): While LEAPS are long-term, understanding key support and resistance levels can still be beneficial for entry points. E*TRADE's charting tools can assist here.
Step 3: Crafting Your LEAPS Strategy: Call or Put?
Once you've identified an underlying asset, you need to determine your directional bias. Are you bullish (expecting the price to go up) or bearish (expecting the price to go down)?
Sub-heading: Choosing Between LEAPS Calls and Puts
LEAPS Call Options (Bullish Strategy):
You buy a LEAPS call if you believe the underlying stock's price will significantly increase over the long term.
A call option gives you the right, but not the obligation, to buy 100 shares of the underlying stock at a specified price (the strike price) before the expiration date.
The primary benefit is leverage: you control a large number of shares for a fraction of the cost of buying the actual stock. Your maximum loss is limited to the premium you pay.
LEAPS Put Options (Bearish Strategy or Hedging):
You buy a LEAPS put if you believe the underlying stock's price will significantly decrease over the long term.
A put option gives you the right, but not the obligation, to sell 100 shares of the underlying stock at a specified price (the strike price) before the expiration date.
LEAPS puts can also be used as a long-term hedge for a stock portfolio you already own, protecting against significant downside.
Step 4: Selecting the Right Strike Price and Expiration Date
This is where the "art" of options trading comes in. Your choice of strike price and expiration date will significantly impact the cost and potential profitability of your LEAPS.
Sub-heading: Picking Your Strike Price
For LEAPS Calls:
In-the-Money (ITM) Calls: These have a strike price below the current stock price. They are more expensive but carry less risk of expiring worthless and have a higher delta (meaning they move more in line with the stock price). They behave more like owning the stock directly.
At-the-Money (ATM) Calls: The strike price is equal to or very close to the current stock price. These offer a good balance of cost and delta.
Out-of-the-Money (OTM) Calls: These have a strike price above the current stock price. They are cheaper but riskier, as the stock needs to move past your strike price to be profitable. They offer the most leverage but are also more susceptible to time decay.
Consider your conviction: If you're highly confident in a large move, a slightly OTM call offers greater percentage returns if successful. If you want a safer bet that mimics stock ownership, an ITM call might be better.
For LEAPS Puts:
In-the-Money (ITM) Puts: Strike price above the current stock price. More expensive, less risk of expiring worthless.
At-the-Money (ATM) Puts: Strike price equal to or very close to the current stock price.
Out-of-the-Money (OTM) Puts: Strike price below the current stock price. Cheaper, riskier, offer more leverage.
Sub-heading: Choosing Your Expiration Date
QuickTip: Slowing down makes content clearer.
Longer is Generally Better for LEAPS: The defining characteristic of LEAPS is their extended expiration. Aim for options that are at least one year out, and preferably two to three years if available.
Time Decay (Theta): While LEAPS are less affected by time decay than short-term options, it's still a factor. The longer the time to expiration, the more time value the option has, and the slower it decays.
Upcoming Events: While LEAPS are long-term, consider any major company or industry events (e.g., product launches, regulatory decisions) that might occur within your chosen timeframe.
Step 5: Placing Your Order on E*TRADE
Now that you've done your homework, it's time to execute the trade.
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Sub-heading: Navigating ETRADE's Options Chain*
Search for the Underlying Asset: On the E*TRADE platform, use the search bar to find the ticker symbol of the stock or ETF you've chosen.
Go to the Options Chain: Once on the asset's page, look for a tab or section labeled "Options," "Options Chain," or "Trade Options."
Select Expiration Date: In the options chain, you'll see various expiration dates listed. Scroll down or use the dropdown menu to find the LEAPS expirations (those typically a year or more out, often in January cycles).
Identify Call/Put and Strike Price:
You'll see a list of call options and put options with different strike prices for your chosen expiration date.
Click on the bid price (if selling) or ask price (if buying) of the specific LEAPS call or put you wish to trade. This will usually populate an order ticket.
Fill Out the Order Ticket:
Action: Select "Buy to Open."
Quantity: Enter the number of contracts you want to buy (remember, one option contract typically controls 100 shares).
Order Type:
Limit Order: Highly recommended for options. You specify the maximum price you are willing to pay per contract. Your order will only execute at that price or better. This gives you control over your entry price.
Market Order: Generally not recommended for options. This executes immediately at the best available market price. Options prices can be volatile, and you might get a worse price than anticipated, especially for less liquid LEAPS.
Price: If using a limit order, enter your desired premium per contract.
Time in Force:
Day: The order is good only for the current trading day.
Good 'Til Canceled (GTC): The order remains active until it's filled or you cancel it (typically up to 60 days). This is often useful for LEAPS if you're waiting for a specific price.
Review and Place Order: Carefully review all the details of your order before clicking "Place Order" or "Confirm."
Step 6: Monitoring and Managing Your LEAPS Position
Buying LEAPS is not a "set it and forget it" strategy, even though it's long-term. Markets change, and so do company fundamentals.
Sub-heading: Key Aspects of Managing Your LEAPS
Regular Monitoring:
Keep an eye on the underlying stock's performance.
Stay updated on company news, earnings reports, and industry developments.
Monitor the value of your LEAPS contracts.
Profit Taking:
If the stock moves significantly in your favor, you don't have to wait until expiration. You can sell your LEAPS for a profit at any time before expiration.
Consider setting profit targets beforehand.
Risk Management:
Stop-Loss Levels: While you risk only the premium paid when buying LEAPS, you might want to set a mental or actual stop-loss if the stock moves against you. This helps limit your losses.
Adjustments: In some cases, you might consider adjusting your position, such as rolling your LEAPS to a different strike price or expiration date, though this involves additional transactions and fees.
Expiration Considerations:
As expiration approaches (especially within the last few months), time decay will accelerate.
You have three main choices at expiration:
Sell to Close: This is the most common option. You sell your LEAPS contract on the open market to realize your profits or cut your losses.
Exercise the Option (Calls): If your call option is in-the-money and you have the capital, you can exercise it to buy 100 shares of the underlying stock at the strike price.
Exercise the Option (Puts): If your put option is in-the-money, you can exercise it to sell 100 shares of the underlying stock at the strike price (assuming you own the shares or are prepared to short them).
Let Expire Worthless: If the option is out-of-the-money at expiration, it will expire worthless, and you will lose the entire premium paid.
Risks of Trading LEAPS
While LEAPS offer significant advantages, it's crucial to understand their risks:
Loss of Entire Investment: If the underlying stock doesn't move as anticipated, your LEAPS can expire worthless, and you will lose 100% of the premium paid.
Time Decay (Theta): Although slower than short-term options, time decay still erodes the value of your LEAPS as expiration approaches.
Volatility: While volatility can increase LEAPS value, a decrease in implied volatility can negatively impact their price.
Liquidity: Some LEAPS, especially on less popular stocks or very far-out expiration dates, might have lower trading volume, leading to wider bid-ask spreads and potentially making it harder to enter or exit a position at your desired price.
Complexity: Options trading, including LEAPS, is more complex than simply buying stocks. It requires a solid understanding of options Greeks (Delta, Gamma, Theta, Vega, Rho) and market dynamics.
10 Related FAQ Questions
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How to choose the right stock for LEAPS?
Look for companies with strong fundamentals, a clear growth trajectory, and a stable competitive advantage that you believe will continue to perform well over the next 1-3 years. Use E*TRADE's research tools to analyze earnings, industry trends, and analyst ratings.
How to determine the best strike price for a LEAPS call?
For bullish LEAPS calls, consider slightly in-the-money (ITM) or at-the-money (ATM) strikes. ITM options offer more direct exposure to stock movements, while ATM options balance cost and leverage. Out-of-the-money (OTM) calls are cheaper but require a larger move in the underlying to be profitable.
How to determine the best strike price for a LEAPS put?
For bearish LEAPS puts, consider at-the-money (ATM) or slightly out-of-the-money (OTM) strikes if you expect a significant decline. For hedging purposes, in-the-money (ITM) puts offer more immediate protection.
How to select the optimal expiration date for LEAPS?
Choose an expiration date that gives the underlying asset ample time to make your anticipated move, typically 1 to 3 years out. This minimizes the impact of time decay. January expirations are common for equity LEAPS.
How to check my options approval level on E*TRADE?
Log into your E*TRADE account, navigate to "Account Services" or "My Profile," and look for the "Options Trading" or "Trading Permissions" section. Your current approval level will be displayed there.
QuickTip: Don’t ignore the small print.
How to calculate the break-even point for a LEAPS call?
The break-even point for a LEAPS call is the strike price plus the premium paid per share. For example, if you buy a $50 strike call for $5.00, your break-even is $55.00.
How to calculate the break-even point for a LEAPS put?
The break-even point for a LEAPS put is the strike price minus the premium paid per share. For example, if you buy a $50 strike put for $5.00, your break-even is $45.00.
How to close a LEAPS position on E*TRADE?
Go to your portfolio on E*TRADE, find the LEAPS contract you own, and select the "Trade" or "Sell" option. Choose "Sell to Close" as the action, enter your desired price (limit order recommended), and submit the order.
How to avoid common mistakes when buying LEAPS?
Avoid speculating on short-term movements. Ensure strong conviction in the long-term prospects of the underlying asset. Don't over-leverage your portfolio, and always use limit orders when buying or selling LEAPS to control your entry and exit prices.
How to understand the fees associated with LEAPS on E*TRADE?
ETRADE typically charges a per-contract fee for options trades (e.g., $0.65 per contract, or $0.50 if you make 30+ trades per quarter). Always check ETRADE's official pricing page for the most up-to-date commission schedule, as regulatory and exchange fees may also apply.
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