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Out-of-the-Money LEAPS- Introduction

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Out-of-the-Money LEAPS Introduction We saw that restricting the sale of at-the-money LEAP puts to  better stocks could significantly increase the proportion of LEAPS that would expire  worthless, thereby reducing financial risk and increasing retention rates and ultimate  profitability. Another way to reduce risk while maintaining adequate retention rates is to  sell LEAP puts that are one or more steps below the at-the-money exercise price.  However, although writing out-of-the-money puts is certainly safer than writing at-the- money puts, the premiums will be correspondingly smaller because of the reduced level  of risk involved.  My study employs two series of computer runs. In the first series, I repeat the  simulations performed in Runs No. 3 and 4, but this time all of the strike prices are set  one step below the at-the-money exercise prices used earlier. Recall that strike price  intervals for LEAP (and standard) options are set in increments of $2.50 when the