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Fig leaf options strategy

What we'll cover

  • How to use a fig leaf options strategy

  • Examples of a fig leaf strategy

  • Potential advantages and risks of the fig leaf strategy

Also known as a leveraged covered call, the fig leaf options strategy is an opportunity for experienced investors who feel mildly bullish.

The fig leaf options strategy acts like a covered call but uses a LEAPS call (Long-term Equity AnticiPation Securities call or long-term call) as a surrogate for owning the stock. Though the two are similar, managing options with two different expiration dates makes a leveraged covered call trickier to run than a regular covered call.

What is the fig leaf options strategy?

Here’s how the fig leaf options strategy works: Buying a long-term call gives you the right to buy the stock at strike A. Selling the call at strike B obligates you to sell stock at that strike price, if you’re assigned.


Why is it called “fig leaf,” you might ask? Because you’re technically “covered” — if you were assigned on the short call, you could always exercise the long-term call to cover the position. Therefore, a fig leaf is not a trade with unlimited risk. But, if you happen to be assigned on the short call, you don't actually own the stock — just the right to buy it at the strike price. Bottom line, this is not as straightforward as a covered call (hence the name “fig leaf”).


You could theoretically exercise your long-term option to buy the stock, but then you’d lose whatever time value is left in that option contract — so that’s probably not your most desirable move. In most cases, you might prefer to sell to close your option, then buy the stock outright to make good on your obligation. 

How to use the fig leaf options trading strategy?

With the fig leaf options strategy, the goal is to purchase a long-term call that will see price changes similar to the stock. So, you might look for a call with a delta of 0.80 or more. (One of the so-called “greeks” of options trading, “delta” refers to the amount a theoretical option’s price will change for a corresponding one-unit, or point, change in the price of the underlying security.) As a starting point, when searching for an appropriate delta, check options that are at least 20% in-the-money. For a particularly volatile stock, you may need to go deeper in-the-money to find the delta you’re looking for.


Some investors favor this strategy over a covered call because you don’t have to put up all the capital to buy the stock. That means the premium you receive for selling the Out-of-the-money call will represent a higher percentage of your initial investment than if you purchased the stock outright. The potential return is leveraged.


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Examples of a fig leaf options strategy (a.k.a. a leveraged covered call)

Imagine the underlying XYZ is currently trading at 134.50. To open the fig leaf strategy, we’ll enter an order for the following:

  • Sell a 14-day XYZ 140 Strike Call (this is strike price B) for
    a credit of 1.30

  • Buy a 400-day XYZ 110 Strike Call (this is strike price A)
    for a debit of 37.50

  • Net debit for the entire trade is 37.50 - 1.30 = 36.20

Image of a phone screen showing this fig leaf strategy example

Our long-term call is 400 days from expiration, which is also in line with the usual guidelines for this trade — usually the long-term call will be one to two years from expiration. We chose our short-term call with only 14 days to go — again in line with typical guidelines, in which the short-term call is usually seven to 30 days from expiration, depending on the pricing conditions for the options for the underlying stock.


If we graph this example trade’s profit and loss, it looks like this:

Image of a leveraged covered call, or fig leaf strategy, graph depiction

You’ll note that the profit and loss lines are not straight in the graph. That’s because the long-term call is still open when the shorter-term call expires. Straight lines and hard angles usually indicate that all options, or legs, of a strategy share the same expiration date. That’s not the case here.


With this example trade, you want the stock to remain as close to the strike price of the short option as possible at expiration without going above it. In other words, you want XYZ to hover around 139-ish without going beyond 140, the strike of your short option.


Maximum Potential Profit is limited to the premium we received for the sale of the front-month call (1.30 in the example above), plus the performance of the long-term call. If you’re lucky, you may be able to sell multiple short-term calls at later dates over the lifetime of the long-term call. Each time you could earn a premium for that sale, and those premiums will hopefully add up over time. In this strategy, it's difficult to precisely calculate your max profit, because it depends on how the long-term call performs at the expiration of the sold short-term option contract.


Maximum Potential Loss is limited to the net debit paid to establish the strategy — in this case, 36.20 (or $3,620 plus commissions). Again, these multiple expirations within the strategy make it difficult to approximate breakeven points for the trade. Note that you can't precisely calculate your risk at the onset because it depends on the LEAPS call's performance and the premiums received for any additional short-term calls sold at later dates.

When should you apply the fig leaf options strategy?

Some investors choose to run this strategy on an expensive stock they would like to trade but don’t want to spend the capital to buy at least 100 shares. They want the stock to remain as close to the strike price of the short option as possible at expiration without going above it, and they're generally feeling bullish on the stock over a fairly long time period.


If the stock price exceeds the strike price of the short option before expiration, an investor might consider closing out the entire position. The idea is that if the strategy was implemented correctly, there would be a profit in such a case.


If assigned on the short call, an investor might try to avoid the mistake of exercising the long-term call. It may make more sense to sell the long-term call on the open market, in order to capture the time value (if there’s any remaining), along with the intrinsic value. Simultaneously, buying the stock may cover a newly created short stock position. This is when it pays to have a broker with deep knowledge of options trading.

Advantages of the fig leaf strategy

Again, the fig leaf or leveraged covered call strategy appeals to an experienced investor who’s bullish on an expensive stock. The fig leaf option strategy allows them to trade on this stock without spending the capital to buy at least 100 shares and limits the risk to the net debit paid for the option contracts.


Because buying the long-term call is, as the name suggests, a longer-term play, you can sell multiple shorter-term calls against the bought call. That means, if all goes well, you can collect multiple premiums from those call sales, which increases your profit for the trade.


Time decay is on your side with this trade, because the front-month option(s) you sell will lose value faster than the back-month long-term call option.

Risks of the fig leaf strategy

Naturally, investing in fig leaf options comes with additional risks. Unlike stock, the long-term eventually expires. When they do, it’s possible that you could lose the entire value of your initial investment, if the stock price is below the bought call strike price at the option contract's expiration.


Unlike a covered call (where you typically wouldn’t mind being assigned on the short option), when running a fig leaf, you don’t want to be assigned on the short call because you don’t own the stock yet. You only own the right to buy the stock at the strike price of the call option contract you own.


You wouldn’t want to exercise the call you own to buy the stock because of all the time value you’d give up. Instead, you hope your short call will expire out-of-the-money so you can sell another, and then another, and then another until the long-term call expires.


You might still be a little nervous about implementing the fig leaf strategy into your own investing practice. Take it slow and consult your option trading resources as you go — you're bound to get more comfortable with practice.

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