Level 2 FAQs

Yes. Because LEAPS options are more bullish positions, we recommend members to learn how to set up spreads during downward markets in conjunction to buying options. Learning how to set up spreads can help members reduce their risk when purchasing LEAPS options.

No. We recommend that you learn and practice Level 1 strategies before progressing to Level 2 and 3 strategies.

The bid-ask spread shows the difference between a party willing to sell a security and a party willing to purchase the same security. The market maker, or the middle person that helps facilitate the transaction between both parties, will typically collect the difference between the bid-ask spread.

If you are selling options, such as selling a covered call, cash-secured put, LEAPS option, or the second leg of your bear call spread, you are most likely going to sell towards the bid price of the option. If you are buying options, such as buying back a sold call, LEAPS option, or the first leg of your bear call spread, you are most likely going to buy towards the ask price of the option.

A narrow bid-ask spread can range anywhere between $0.01 to $0.20 per share. A wide bid-ask spread can range anywhere between $1.00 to $4.00 per share. Again, this is relative and is dependent on the price of the underlying security.

The more narrow the bid-ask spread, the more liquidity there typically is. This means that it will be easier to get your orders filled. Conversely, the more wide the bid-ask spread, the less liquidity there typically is. This means that it will be harder to get your orders filled.

The bid-ask spread is typically more narrow when you are closer NTM and in expiration date. Conversely, the bid-ask spread is typically more wide when you are deep ITM, far OTM, and/or far out in expiration, such as a LEAPS option.

Go to the option chain and select which LEAPS call option you want to buy. Since you are the buyer of the option, you may need to choose the price towards the asking price to get your order executed/filled faster. Make sure that you select "buy to open" since you are buying to open a position.

We like to choose expiration dates that have an expiration of 365 days or more. These options have longer expiration dates, which means that they have lower theta decay.

In a bullish market with a positive market sentiment, we typically like to select deltas between 0.50-0.70. To be more conservative, we like to select deltas between 0.70-0.80.

Buying deep in-the-money (or DITM) options are more conservative since there is more intrinsic value compared to extrinsic value in the options. Intrinsic value cannot be decayed by theta. Extrinsic value can only be decayed by theta.

Options can lose extrinsic value by (1) theta decay and (2) reduced implied volatility. Each day you own an option, the value of the option will lose a little bit of value due to theta decay. Also, when you hold an option through an earnings date, the option typically will have a drop in implied volatility (IV) right after a company delivers their quarterly report. This drop in implied volatility is commonly known as "volatility crush."

When you trade LEAPS options, your goal is to buy LEAPS options and sell them for a profit as quickly as possible. We like to set a profit target of around 5-10% when trading LEAPS. When you invest in LEAPS options, we like to hold onto them for around 3-6 months and sell them a couple days before their earnings date.

We like to quickly trade LEAPS options with deltas around 0.50. We like to invest in LEAPS options with deltas around 0.80 and hold onto them for 3-6 months.

The biggest risk of purchasing a LEAPS option is if the LEAPS option decreases in value due to (1) the drop in the underlying stock price and (2) reduced extrinsic value from reduced implied volatility. Remember that LEAPS options are leveraged securities that have magnified movements based on the underlying stock. LEAPS can quickly increase and decrease in value. This is why we recommend having no more than 10% of LEAPS in our portfolios.

LEAPS options are leveraged securities that have magnified movements based on the underlying stock and the Greeks associated with the options. Because of the nature of these securities, we recommend having no more than 10% of LEAPS in our portfolios.