My first disclaimer is I'm a novice when it comes to options. My second disclaimer is I'm

*making a blanket endorsement of leverage. But for some investors, it is a reasonable option to consider. Those who consider it should think about it long and carefully.*

**NOT**The authors recommend buying LEAPS call options on SPY, an S&P500 ETF. The reason for SPY is its comparatively high liquidity, versus other options. This limits the diversification potential of this strategy.

Call options consist of elements of leverage and downside protection. The downside protection increases the implied interest rate. To make leverage work, one wants the implied interest rate as low as possible. Therefore, one wants minimal downside protection.

To keep the implied interest rate low, one wants the extrinsic volatility or time value of the call option to be as close to zero as possible.

One also wants the call option return to correlate as highly as possible with the return of SPY. In other words, one wants delta to be as close to 1.0 as possible.

To achieve these ends, the authors advocate 2 year deep in the money call options on SPY.

http://www.investopedia.com/articles/op ... z1iSnfqEBc

http://seekingalpha.com/article/28161-i ... n-steroids

The above 2 links provide a way to implement this strategy. It is suggested to roll over LEAPS call options: "a two-year LEAP call could be held for a single year and then sold and replaced by another two-year option."

The following is my variant, which comes from my experience as a buy and hold investor and with bond ladders.

Divide the money for this strategy into three equal portions. Buy LEAPS on SPY. One LEAPS expires in 1 year, the second in 2 years and the third in 3 years. Sell each LEAPS just prior to expiration. After each LEAPS is sold, buy a LEAPS that expires in 3 years. When one wants to end the leverage strategy, stop buying LEAPS each year.

My variant decreases the costs associated with bid ask spreads and commissions. It also diversifies LEAPS risk, by dividing LEAPS into three different years. However, it might increase the time value of the options purchased.

In both approaches, one sells the LEAPS call options. SPY is an equity settled option. When the option is exercised, one has the right to buy SPY shares at the exercise price. If one has the cash to buy the SPY shares, then exercising the option and selling the SPY shares might be less costly than selling the LEAPS call option. Also, if one has enough money, one could buy an option on S&P500 futures, $SPX.X. Such an option costs ten times as much as an option on SPY, but an $SPX.X option is cash settled, which means one doesn't have to pay the bid ask spread. This might also decrease cost.

Comments on how to implement this strategy using LEAPS are appreciated.