Selling Long-Dated Put Options
A comprehensive analysis of LEAP puts as instruments for strategic acquisition and volatility arbitrage, distinct from short-term income strategies.
I. Core Thesis & Strategic Intent
Why this is NOT a theta-decay strategy.
The "Why": Defining the Strategy
Selling a LEAP put (1+ year to expiration) is fundamentally different from selling a 30-day put. While short-term options are "Theta" (time) plays, LEAP puts are dominated by Delta (long-term price direction) and Vega (volatility levels).
"An investor who sells a 2-year LEAP put to 'collect income' is engaging in a profoundly inefficient use of capital."
Primary Goals
- Strategy A: Acquisition"Buffett-Style" Synthetic Limit Order. Goal is assignment at a discount.
- Strategy B: Volatility Arb"Short Vega" Play. Goal is mean reversion of high Implied Volatility (IV).
Comparative Greek Profile: 2-Year vs 30-Day
| Metric | 2-Year ATM Put (LEAP) | 30-Day ATM Put | Strategic Implication |
|---|---|---|---|
| Vega (ν) | Extremely High (~$2.50) | Low (~$0.40) | LEAP P/L is driven by changes in Volatility. A 1% drop in IV creates massive profit. |
| Theta (Θ) | Very Low / Linear (~$0.40/day) | High / Exponential (~$9.00/day) | LEAPs are terrible for "daily income." You are not paid to wait; you are paid for risk. |
| Gamma (Γ) | Stable / Low (0.001) | Explosive / High (0.008) | LEAPs are stable. Short-term puts have "Gamma Risk" (rapid losses during crash). |
II. Institutional Mechanics
How Market Makers and Hedge Funds utilize this structure.
Case Study 1: The Buffett Put (1993)
Coca-Cola (KO) Acquisition
- Context: KO trading at $40. Buffett wants it at $35.
- Trade: Sold 5M puts @ $35 Strike.
- Premium: Collected $7.5 Million ($1.50/share).
- Outcome: Stock stayed >$35. Puts expired worthless.
Lesson: He was paid $7.5M for the "risk" of buying a stock he wanted to buy anyway.
Case Study 2: The OXY Misconception (2019)
Occidental Petroleum (OXY)
Often cited as a put sale, this was actually Strategic Financing.
- Deal: Berkshire gave $10B cash.
- Received: 8% Preferred Stock + Warrants (Long Calls).
Lesson: This was a LONG Volatility play (warrants), not a short put strategy.
The Counterparty: Dividend Arbitrage
Who buys deep ITM LEAP puts? Often, it is Dividend Arbitrageurs. They perform a "Conversion" or "Box Spread" strategy.
*You (the LEAP seller) provide the necessary liquidity for this risk-free institutional trade.
III. Quantitative Pitfalls
The 'Retail Traps' that destroy value.
Trap 1: The Illiquidity & Slippage Cost
Unlike monthly options, LEAPs have massive bid-ask spreads.
| Ticker / Type | Expiration | Bid / Ask | Spread Cost ($) | Slippage % (One-Way) |
|---|---|---|---|---|
| SPY (ETF) | Dec 2026 | $38.72 / $39.50 | $78 | ~1.99% |
| AAPL (Tech) | Jan 2027 | $88.35 / $89.70 | $135 | ~1.52% |
| VST (Volatile) | Jan 2026 | $17.15 / $19.55 | $240 | ~13.08% ! |
Trap 2: The Vega "Time Bomb"
Modeling a Short VST 2-Year ATM Put (Initial IV: 54%).
What happens after 6 months if the market panics?
*Critical Finding: In Scenario 2, the stock price stayed flat ($195), but you lost $1,189 solely because Fear (IV) increased.
Trap 3: Capital Inefficiency ("Dead Money")
Strategy: LEAP Put
18.1% ROC
Max Return on Capital (2 Years)
Strategy: Monthly Puts
130.9% ROC
Max Return on Capital (2 Years - Compounded)
IV. Practical Guide
Execution framework for the Retail Investor.
OTM Strike
Delta -0.20 to -0.40
- Goal: Buy the dip.
- Risk: Missing the upside if stock rallies.
- Ideal for: Value investors.
ATM Strike
Delta ~ -0.50
- Goal: Maximize Vega exposure.
- Risk: The "Time Bomb" (IV expansion).
- Ideal for: Volatility Arbitrageurs.
Deep ITM
Delta -0.80 to -1.0
- Goal: Synthetic Stock Ownership.
- Benefit: Capital efficiency + Interest.
- Risk: Early Assignment (Dividends).
The "No-Exit" Rule
Due to the liquidity trap, you must assume you are married to this position for 2 years.
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Educational Disclaimer
This article is for educational and informational purposes only. Options trading involves substantial risk and is not suitable for all investors. The strategies discussed require significant capital, risk tolerance, and understanding of derivatives. Past performance does not guarantee future results. Always consult with a qualified financial advisor before implementing any options strategy. The author and publisher are not responsible for any losses incurred from the use of this information.