Buying LEAPs on fundamentals: the gate, then the chain
How a long-dated call is selected when the thesis comes from the balance sheet rather than from the chart.
7 min read · updated
The company has to qualify before any option is priced
The LEAP screen is two stages, and the first one has nothing to do with options. A company must sit far enough below a conservative fair value that a long call has room to work, be profitable, carry manageable leverage, be liquid, and not be diluting. Only the names that clear that gate have their chains pulled at all.
Fair value here is deliberately dull: trailing net income times a no-growth earnings multiple, or book value times a book multiple for companies that lost money. It is a valuation anchor, not a forecast, and both multiples are thresholds you can change.
Profitability is required on this screen and not on the value screens, for one reason: a long call expires. A turnaround that arrives eventually still loses the entire premium if it arrives after expiry.
Then the contract filters
Surviving names have their chains filtered on expiry (at least a year out, and not so far out that the quotes become fiction), on moneyness, on open interest and bid-ask spread, on delta, on effective leverage, on how much of the price is time value, on the compound annual move required just to break even, and on implied volatility relative to the stock's own realised volatility.
That last one matters more than it sounds. A cheap thesis expressed through an expensive option is not a cheap position. Comparing implied against the underlying's trailing realised volatility is the check that you are not paying for a move the stock has never made.
Where the greeks come from
No quote source ships greeks. So implied volatility is inverted from the quoted mid using Black-Scholes, and delta is computed from that. Effective leverage, extrinsic value and breakeven CAGR follow. A contract that cannot be priced is dropped rather than guessed at.
Each surviving contract carries a score out of 20 — weighted toward implied-volatility cheapness, then liquidity, then leverage, then breakeven burden — and contracts are ranked on that rather than on headline return, because headline return is just a function of how far out of the money you were willing to go.
What it is not
This is a directional bet with a hard expiry and a total-loss floor. If the strike is still below the price at expiry, the whole premium is gone. Nothing in either LEAP screen concerns selling premium or getting paid to wait; those are different strategies with different risks.