You don't need $20,000 to take a position in a $200 stock

Hello {{first_name|Investor}} -

Last issue I walked through my checklist for entering high-conviction stocks that already ran — the pre-entry rules and position sizing rules I use before every hot stock buy. If you missed it, catch up here.

That framework assumes you're buying shares. But there's a problem: some of the best businesses trade at prices that make even a starter position expensive. A 25% starter on a stock trading at $200 per share means buying roughly 12–13 shares — that's over $2,500. At $500 per share, a starter can run $6,000+. For a lot of self-directed investors building toward work-optional, that's a meaningful chunk of capital for a single name.

LEAPs are a tool that solves this. (And U.S. Congresswoman, Nancy Pelosi, utilize this strategy for her investments.) This issue covers what they are, how I think about using them, and where they fit alongside a standard share-based entry.

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If you've never traded options, here's what you need to know for this issue.

An option is a contract that gives you the right — but not the obligation — to buy or sell a stock at a specific price by a specific date. You pay a price upfront for this contract, called the premium.

A call option gives you the right to buy. A put option gives you the right to sell. Each contract controls 100 shares.

Every option has two key terms: the strike price (the price at which you can buy or sell) and the expiration date (the deadline by which you must use that right, or the contract expires worthless).

Options that expire within a few weeks or months are short-term. Options that expire a year or more out are LEAPs — Long-Term Equity Anticipation Securities. That's the focus of this issue.

A LEAP is just a call option with a long expiration — typically one to two years out. You're buying the right to purchase 100 shares of a stock at a specific price, with a long runway before that right expires.

Here's why that matters for entry: instead of buying 100 shares of a $200 stock ($20,000), you can buy a deep in-the-money LEAP — say, a call with a $150 strike expiring in January 2028 — for a fraction of that cost. The contract might cost $60 per share, or $6,000 total for control of 100 shares.

You've reduced your capital outlay by 70%, while maintaining exposure to the same 100 shares. If the stock goes to $250, your LEAP gains roughly dollar-for-dollar with the shares above your strike.

Not all LEAPs are created equal. The strike price you choose changes the risk profile significantly.

A deep in-the-money (ITM) LEAP — where the strike price is well below the current stock price — behaves most like owning shares. Most of the premium you pay is intrinsic value (the real, tangible difference between the strike price and the current stock price). A smaller portion is extrinsic value (the time premium you're paying for the right to hold the contract until expiration — this is the part that decays over time).

An out-of-the-money (OTM) LEAP — where the strike price is above the current stock price — is cheaper, but it's almost entirely extrinsic value. The stock has to move up past your strike before the contract has any intrinsic worth. If it doesn't move enough before expiration, you lose the entire premium.

For using LEAPs as an entry method — as a substitute for a starter position in shares — I focus on deep ITM strikes. The goal is to approximate share ownership at lower capital cost, not to make a leveraged bet on direction.

A useful number to know: the delta of an option tells you roughly how much the option price moves for every $1 move in the stock. A deep ITM LEAP with a delta of 0.80 means it moves about $0.80 for every $1 the stock moves. The deeper in the money you go, the closer the delta gets to 1.00 — which means the LEAP behaves more and more like owning the shares outright. I look for deltas of 0.75 or higher.

Here's the mental framework. A LEAP is not a replacement for shares in a portfolio you plan to hold for a decade. It's a capital-efficient way to establish exposure while you build the position over time.

Rule 1: Same pre-entry checklist applies.

Everything from the starter position framework still holds. Can you explain the thesis? Do you know what's priced in? What proves you wrong? If you can't pass those checks for shares, you can't pass them for a LEAP. The instrument changes — the discipline doesn't.

Rule 2: Deep ITM, long-dated.

I buy LEAPs with at least 12 months to expiration, and I target a delta of 0.8 or higher. At the time of this writing, June 2027 or January 2028 expiration is where I look first. This keeps the LEAP behaving like shares rather than a lottery ticket. Shorter expirations and lower deltas introduce time decay risk that works against you — the clock eats your premium faster than the stock can earn it back.

Rule 3: Timing matters — premiums on hot stocks are inflated.

This is the part most people miss. When a stock is running hot, options premiums run hot with it. Volatility is elevated, and the extrinsic portion of your LEAP can balloon — sometimes you're paying a 40–50% premium over intrinsic value. That's a steep cost for time that will decay every day you hold.

Thre windows I look for to get a better price on the LEAP:

After earnings. The hype and volatility around an earnings date get priced into options premiums. Once the event passes and the dust settles, that volatility premium deflates — even if the stock didn't move much. The same LEAP can cost meaningfully less the week after earnings than the week before.

When the stock is range-bound. If the stock has been consolidating — trading sideways within a defined range after a run — volatility compresses and premiums come down. Entering during a range also gives you a clearer picture of support levels, and positions you to benefit if the stock expands out of that range.

When the broad market is down but is holding long-term bullish trend. If the broad market is down, individual stocks rarely can fight it. While the high-growth stocks often go down further relative to the market, these stocks are often the first to bounce back, especially if they have strong businesses.

Rule 4: Size it like a starter.

The same sizing rules apply. The LEAP premium is my position size — and I apply the same 25% of max position, capped at 1% of total conviction holdings. The fact that a LEAP controls 100 shares doesn't mean I should size it like a full position. The leverage cuts both ways.

Rule 5: Have a plan for expiration.

A LEAP has a deadline. Shares don't. Time decay stays relatively mild for most of a LEAP's life, but it accelerates sharply in the final 60 days — and the last 30 days are where it really picks up speed. That's why I start planning my exit, exercise, or transition at the six-month mark, well before the acceleration kicks in.

Three options: rolling the LEAP forward (selling the current one and buying a new one with a later expiration), exercising it into shares if I have the capital and want to hold long-term, or closing the position entirely. No LEAP should expire without a decision already made.

LEAPs are not shares, and the differences matter.

Time decay. Every day that passes, the extrinsic portion of your LEAP loses a small amount of value. Deep ITM strikes minimize this, but it never goes to zero. You're paying rent on a position that share ownership gives you for free.

No dividends. LEAP holders don't receive dividends. If you're buying a high-dividend stock, this cost adds up over the life of the contract.

Expiration risk. If the stock drops significantly and your LEAP moves out of the money, you can lose the entire premium. With shares, you can hold indefinitely and wait for a recovery. With a LEAP, the clock is always running.

Liquidity. LEAPs on smaller or less liquid stocks can have wide bid-ask spreads — the gap between what buyers are willing to pay and what sellers are asking. This means you may pay more to enter and receive less when you exit. Stick to names with active options markets.

LEAPs aren't better or worse than shares — they solve a different problem. If your conviction passes the checklist, your position sizing is disciplined, and the main barrier to entry is the capital required to buy shares, a deep ITM LEAP gives you a way in.

If you have the capital for shares and plan to hold for years, just buy shares. Simpler, no expiration, no time decay.

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As always: I won't tell you what to buy. I'll sharpen the lens you use to look.

Stay disciplined - Koh

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Disclaimer: Nothing in this newsletter constitutes investment advice or a recommendation to buy or sell any security. Numbers and observations are as of publication. I may hold positions in companies discussed above. Always do your own research and consult a licensed financial advisor before making investment decisions.