Chapter 25: LEAPS 403 
passed, the straddle seller could reasonably expect to have a profit of about 40% of 
the original straddle price. However, if one had sold a 2-year LEAPS straddle, and 
the stock were relatively unchanged after two months, he would only have a profit of 
about 7% of the original sale price. This should not be surprising in light of what has 
been demonstrated about the decaying of long-term options. It should make the 
straddle seller somewhat leery of using LEAPS, however, unless he truly thinks the 
options are overpriced. 
Second, consider follow-up action. Recall that in Chapter 20, it was shown that 
the bane of the straddle seller was the whipsaw. A whipsaw occurs when one makes 
a follow-up protective action on one side (for instance, he does something bullish 
because the underlying stock is rising and the short calls are losing money), only to 
have the stock reverse and come crashing back down. Obviously, the more time left 
until expiration, the more likely it is that a whipsaw will occur after any follow-up 
action, and the more expensive it will be, since there will be a lot of time value pre­
mium left in the options that are being repurchased. This makes LEAPS straddle 
selling less than attractive. 
LEAPS straddles may look expensive because of their large absolute price, and 
therefore may appear to be attractive straddle sale candidates. However, the price is 
often justified, and the seller of LEAPS straddles will be fighting sudden stock move­
ments without getting much benefit from the passage of time. The best time to sell 
LEAPS straddles is when short-term rates are high and volatilities are high as well 
(i.e., the options are overpriced). At least, in those cases, the seller will derive some 
real benefit if rates or volatilities should drop. 
SPREADS USING LEAPS 
Any of the spread strategies previously discussed can be implemented with LEAPS 
as well, if one desires. The margin requirements are the same for LEAPS spreads as 
they are for ordinary equity option spreads. One general category of spread lends 
itself well to using LEAPS: that of buying a longer-term option and selling a short­
term one. Calendar spreads, as well as diagonal spreads, fall into that category. 
The combinations are myriad, but the reasoning is the same. One wants to own 
the option that is not so subject to time decay, while simultaneously selling the 
option that is quite subject to time decay. Of course, since LEAPS are long-term and 
therefore expensive, one is generally taking on a large debit in such a spread and 
may have substantial risk if the stock performs adversely. Other risks may be pres­
ent as well. As a means of demonstrating these facts, let us consider a simple bull 
spread using calls.