I just wrapped up my third book on buying LEAPS, and this one brings a fresh perspective. The author suggests allocating 20% of your portfolio to an at-the-money (ATM) LEAP on SPY, with the remaining 80% invested directly in SPY shares. The entry signal he recommends is quite specific: buy in when SPY closes above its 200-day simple moving average (SMA) for 5 out of 10 trading days. Conversely, you should buy a put LEAP on SPY when it finishes below the 200-day SMA for 5 out of 10 trading days. He's tested this strategy extensively, starting from early 2007 until the book was written, and it has significantly outperformed the S&P 500.

My concern with the strategy lies in its use of ATM options, which are prone to substantial time value decay. If you opt for deep-in-the-money (DITM) options instead, you can often find options that carry only about 5% to 10% time value, making them a more cost-effective choice in terms of decay.

Berkshire Hathaway FAQ

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