How I Turned Around My LEAPS Position: Trading Through the Down Moves

Every trader has those moments where hindsight becomes a harsh teacher. My recent experience with Google LEAPS contracts proved to be one of those valuable learning opportunities. What started as a potential disaster turned into a masterclass in position recovery, thanks to two powerful strategies: Dollar Cost Averaging (DCA) and Covered Calls. Let me walk you through how I managed to significantly reduce my losses in just one week.

The Initial Setup: When Optimism Meets Market Reality

Like many traders, I had strong convictions about Google’s upward potential. The technical indicators looked promising, and the fundamentals seemed solid. This led me to purchase a LEAPS contract with approximately one year until expiration – a position that cost me roughly $4,700. However, the market had other plans.

Market Reversal and Strategic Response

Although we started moving up as I predicted, it wasn’t long before the price went down to where it was, and continued to move downwards. As Google’s price action began showing signs of a potential bearish trend, I knew I needed to act decisively. Instead of panicking or accepting the loss, I implemented a two-part strategy:

1. Strategic Dollar Cost Averaging When the stock declined, I seized the opportunity to purchase a second LEAPS contract at the same strike price. The beauty of this timing was the significantly lower cost – the second contract came at a much better price point. This brought my total investment to $7,294, with an average cost of $3,647 per contract.

Implementing the Recovery Strategy: Covered Calls

With two contracts now in my portfolio, I could execute the second phase of my recovery plan: selling at-the-money calls against my LEAPS position. Here’s how the numbers worked out:

• Current at-the-money call premium: $300 per contract
• Total premium collected from two contracts: $600
• Previous premiums collected: Additional income from earlier weeks’ call sales

Understanding the Risk-Reward Scenarios

Let’s break down the possible outcomes of this strategy:

Scenario 1: Further Price Decline

• The collected premium ($600) provides a significant buffer – The $600 we earned from selling calls acts like a cushion – it helps protect us from losses by giving us extra money in our account regardless of what happens to the stock price.
• Position can withstand a 3-point drop while maintaining breakeven point – If Google’s stock price drops by $3, we won’t actually lose any money overall because the $600 we collected from selling calls covers those potential losses. (2 contracts)
• Long LEAPS will lose value, but premium retention offsets some loss – While our LEAPS options will decrease in value if the stock goes down, we get to keep the $600 from selling calls, which helps reduce how much money we’re losing overall.

We could also continue a campaign to buy more LEAPS contracts as the stock moves down, further reducing our average price per contract. 

Scenario 2: Price Stabilization

• Full premium retention ($600) – no need to pay anything back, option expires worthless.
• No value deterioration in long position – the long does not go down in value. 
• Net positive outcome of $600 – no loss on the long, plus premium collected.

Scenario 3: Price Increase Using a specific example for clarity:

• If Google rises to $187.50 ($2.50 above strike):
  • Short call liability: $500 ($5 × 2 contracts)
  • Premium collected: $600
  • Net profit on short calls: $100 ($6 – $5 = $1)
  • Long LEAPS position: Approximately $500 gain
  • Total position improvement: $600

Key Takeaways for Options Traders

This experience highlights several crucial lessons:

1. Don’t let initial losses paralyze your decision-making
2. Understand how different price movements affect your overall position, not just the short position.
3. Use market downturns as potential opportunities to dollar-cost average
4. Calculate how extrinsic value affects your breakeven point. Remember risk is to the downside.
5. Always know what the worst case scenario is and be happy to accept it.

The combination of dollar cost averaging and covered calls can be a powerful tool for position recovery, but it requires careful planning and execution. Remember, while this strategy worked well in my situation, always adjust your approach based on your specific circumstances and risk tolerance.

[Note: This article is based on real trading experience but should not be considered financial advice. Always conduct your own research and consider consulting with a financial professional before implementing any trading strategy.]