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Well, after being inundated today on posts and PMs, here is some basics on covered calls using DITM LEAPS. First, why would we use a LEAP for a covered call using DITM LEAPS, as opposed to just buying the stock outright? Simple -- higher returns using the leverage of options. For this example, we'll use AAPL, using last Thursday's prices. AAPL cost $663. You could sell the weekly call (making it a covered call), at the following strikes/prices: 660 $10.50 665 $7.80 670 $5.60 675 $3.95 At this point you want to allow some room for upside, so you pick the 670 strike. What are the possible outcomes? 1. AAPL stays the same, you earn $5.60 on the covered call, or 0.84% (yes less than 1%, but remember it is weekly); 2. AAPL goes up, but stays under 670, lets say to 669. At this point you keep the $5.60 in premium, and your stock has appreciated (a good thing). If you were to exit, you would have a gain of $11.60 ($6 in capital gain, $5.60 in premium), or 1.749%; 3. AAPL goes up, above 670. Well this is the same result as number two, except your stock would get called away at 670. So it doesn't matter how much it goes up in price, it still would get called away at 670. So your maximum gain is $12.60 (let's not consider rolling yet); 4. AAPL goes down. Well you again keep the premium, but lose value in the underlying stock. Why CAN (not necessarily, but why can) using LEAPS be better? Well you can do the same strategy for "cheaper" (the cost being higher risk in terms of losses -- as discussed further below). For starters, to sell a call on AAPPL requires you to own at least 100 shares, at a cost of $66,300.00. Let's instead look at the Apr 2013 600 option. That can be purchased for $101.00. I typically would go further DITM, to get my delta closer to 1, but for this example, we'll stay at 600 to keep the math simple. For the price of $10,100.00 you can own the equivalent position as outlaying $66,300.00. But you can get the same amount of premium selling the weekly option short. In other words, I still get $5.60 for selling the weekly 670. So my return is now 5.54% per week instead of under one percent. Over the course of an entire year, this is the difference in turning $10,000.00 into $165,000.00 and turning that same $10,000.00 into $15,549.00. (compound interest is fun). (side note -- that won't happen -- don't expect it -- it won't). Still that difference gives you the flexibility needed to make the trade worthwhile. So what are the outcomes of selling against a LEAP, as opposed to just the stock? If the price stays the same, or rises, the outcome is just as good, if not better, than owning the stock. 1. AAPL stays the same -- keep the premium, return 5.54%, theta is basically zero, so gain; 2. AAPL increases, but to under 670 -- again the same result, keep the premium, and keep the gain in the April call. However, the gain in the april call well be more than just owning the stock on a percentage basis. Let's say the price goes up to the same 669. You keep the $5.60 in premium and the call option has increased in value by $6.00, so now $107.00. So you've gained the same $11.60 on $101 instead of on $663 -- a much better situation. 3. AAPL increases above 670 -- well your gains are capped at $12 (rolling will be discussed later) At this point, this seems like the perfect trade. Unfortunately it is not -- dealing with losses is also leveraged up. If the price of AAPL falls 50 points when you own AAPL, you're looking at a 7.5% loss ((663-50)/663)), whereas you're looking at a FIFTY PERCENT loss on owning the LEAP ($101 - $50 = $51). So, before ever entering this type of trade, realize the potential losses are MUCH larger than in just owning the stock itself. The returns are also much larger -- that's the power of options. Part 2 of this column will discuss how to handle the trade when it starts moving against you. A preliminary suggestion though -- always known when you are going to get out and at what levels and stick to those loss points. If you say I can take a 25% loss on this trade, get out at that point, don't hold "hoping" for the price to rebound).

As one of the other posters noted, I do sell covered calls on LEAPS -- particularly AAPL. That said, someone said they like that strategy because it "limits losses." I would respectfully disagree, as the losses, if any, are amplified over a covered call on a stock. Let's take one I'm in right now. I bought the Dec 600 AAPL Leap when AAPL was at 690, it cost me $91.50. That week I sold the weekly 700 call for $5.50. That's a six percent return in ONE WEEK. If the price goes way up (lets say 710), sure I have to buy the call back for a $10.00 loss, but the LEAP has gained $20 -- so even a better situation. But what if (as actually happened), AAPL drops to 660?. Well my LEAP is now worth $60.00 -- a 30% loss on your principal, in exchange for a 6% gain on the sale. Whereas if you had actually owned AAPL,, the decline from 690 to 660 is only a 4.3% loss. There's a big difference between a 4 percent and a thirty percent loss. The trade off is you still only got the $5.50, which is less than a one percent return. So what to do when the price plummets like that and your LEAP loses value? (technically not a LEAP because it's December). This is where trade management comes in. I'm still positive on AAPL, so I don't panic. What I do is roll short 700 call to a short 690 call (still above my original purchase price) for another $4.00. My "basis" is now $82, so my breakeven price for AAPL is 682. So in week two, I'll sell a call above that price, ideally 685-690 (which is what I did), garnering another $4.00. I continue to do so for as long as you want. WARNINGS: Earnings can play havoc with this as you will get a large price swing. In the perfect world you do this up to one week before earnings, with AAPL's price being steady. You also need to have a plan on what to do if the price REALLY drops out quickly (personally my plan is to avoid stocks where I see a big risk of a 10% decline in the underlying in the short term). Always have your pain point known in advance to know when to just take your losses and exit.