I started buying LEAP options in Feb 2022. It was one of my most profitable strategies, but I have also had many losing trades. I reviewed these losing LEAP trades to try and learn from them.
NKE
From March 2022 to November 2023, I bought 14 LEAP call trades on NIKE, ticker symbol NKE. They failed and I lost money.
I was looking to trade in some defensive stocks. Diversify as taught by some financial gurus. Nike caught my attention. It was the world leader in sports shoes and apparel. I decided to use LEAP calls and poor man’s covered calls to trade NKE.
| Strategy | Trades | Gross Wins | Gross Losses | Net P & L | Average Days Held |
|---|---|---|---|---|---|
| LEAP Calls | 14 | $966.93 | $8,863.11 | -$7,896.18 | 201.8 |
| Covered Calls | 7 | $560.93 | -$576.14 | -$15.21 | 8.3 |
| All Trades | 21 | $1,527.86 | -$9,439.25 | -$7,911.39 |
Mistake 1: Incorrect Entries
Looking back at the charts, it was clear that March 2022 was not the right time to trade in NKE. Both the daily and weekly charts are showing a declining trend. I thought it was a short-lived dip, and the price will recover but I was wrong.
I bought a LEAP call and sold a call at the same time on 15 Mar 2022. I closed both 6 days later (21 Mar 2022) for a nice profit of $710. I was exhilarated with this early success, thinking that I found a suitable ticker to trade.
Mistake 1: Averaging without a thesis reset
I bought my second LEAP call on 22 Mar 2022, immediately after closing the first pair. The price started falling since then. I treated the price drop as a bargain and bought more LEAP calls to lower the average cost. I should have reviewed NKE again to see if it was still a good buy before I decided to double down.
Lesson: No averaging unless the signals are there.
Mistake 2: Many individual trades do not diversify concentration risk
I bought additional LEAP calls one at a time at the same strike price and expiry date. I didn’t realize that these are not separate trades but one big position. I size and track per trade but forgot that it is one big position.
Lesson: Set position size and maximum loss by the ticker, not per trade.
Mistake 3: Later LEAP calls are not true LEAP
I also noticed that my later calls are not LEAPs anymore. For example, the call bought in August 2023 has only 151 days left. These later trades had less time to recover and remained far out of the money. This increases time-decay and total-loss risk.
Lesson: Make sure a LEAP is more than 365 days. Otherwise, factor in the higher time-decay risk when planning the trades.
Mistake 4: Exit discipline is hope-based
My planned exit was Sep 2023. However, I didn’t close the trades until Nov 2023. The decision was made because I noticed that NKE price was recovering. I was able to close at a slightly better premium, but I admit is not a good practice. It is hope because I do not have any data or signals to back it up.
Lesson: Do not extend a stop solely to seek a slightly better exit premium. There must be evidence to support the action, not hope that things will play out.
Mistake 5: High PMCC win rate does not mean profitability
I sold seven poor man’s covered calls during the same period. 5 wins 2 losses resulted in a small loss of $15.21. The small wins came early followed by big losses. It was challenging finding profitable PMCC. My mistake was to sell calls below my cost basis which forced me to close them at a loss when they didn’t work out. The covered calls should be seen as a return enhancer instead of a constant stream of passive income.
Lesson: Do not sell covered calls when the underlying LEAP is below cost basis. Entries should be followed by careful analysis of the market situation.
Mistake 6: Unwilling to Cut Loss
Not cutting loss early is my biggest mistake and the hardest to learn from. I am unwilling to close the trade with a loss until the loss became bigger than necessary. I started wishful thinking, hoping that the price will recover.
Lesson: Learn to see cutting loss as protecting the portfolio. It is not a bad thing.
Conclusion
Despite these mistakes, LEAP options remain one of my favorite strategies. The gains from my successful trades have more than compensated for these losses, but that does not mean the losing trades should be ignored. Every expensive mistake contained a lesson about valuation, timing, conviction, or risk management. By documenting them here, I hope to avoid repeating them and perhaps help other traders avoid making the same errors. Sometimes the most valuable trading lessons are the ones we pay for.
This post is a personal journal and not financial advice.
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