Hedged Equity, Without the Shares: Can LEAPS and Options Lower Volatility and Boost Efficiency?

“What goes up must come down.”

Isaac Newton said it about gravity. Investors whisper it after every rally. And while no option strategy can repeal the laws of physics, or finance, there are ways to soften the fall when markets do what they do best: rise...and then pull back.

In a recent article, Robert Hahn and Robert Cagliola outlined a hedged equity strategy that blends long-term stock ownership, covered call writing, and put spreads to reduce volatility while remaining invested. Their approach produced ~96% of the S&P 500’s return since 2022, but with just two-thirds the volatility.

It’s a thoughtful strategy, and one that I plan to write about later, but there’s one major assumption: you’re holding stock.

What if you replaced the shares with LEAPS calls, long-term, deep-in-the-money options, to replicate equity exposure more efficiently?

Let’s explore the pros, cons, and real-world adaptations of running a hedged equity strategy with a leaner, LEAPS-based portfolio.

The Original Strategy – And Why It Works

The core mechanics are solid:

• Stock Selection: A diversified set of 40–50 high-quality stocks with strong fundamentals and dividends.

• Covered Calls: Calls sold against holdings for income and to dampen upside volatility.

• Put Spreads or Puts: Used to cap downside and reduce sharp drawdowns.

Their reported outcomes? During eight market pullbacks of 5% or more, the portfolio only participated in 62% of the downside. In a world where investors are either all-in or all-out, that kind of tempered exposure matters.

But 40-50 positions is a lot to manage and a lot of capital at play, especially for retail traders or RIAs working with less than institutional capital.

What If We Replaced Shares With LEAPS?

Instead of holding 100 shares of each stock, we can replace that exposure with LEAPS options, deep-in-the-money call options with 12-24 months until expiration.

✅ Why Use LEAPS?

• Capital Efficiency: One LEAPS contract controls 100 shares for a fraction of the cost.

• Defined Risk: Your maximum loss is the premium paid.

• Delta Exposure: With 75-90 delta contracts, you capture most of the stock’s price movement.

• Flexibility: Easier to diversify with smaller capital commitments.

An Example:

• Instead of buying 100 shares of SPY at $590 ($59,000),

• You could buy a Jan 2027 505-strike call (deep ITM, 0.80 delta) for ~$132 premium ($13,200).

• That’s ~78% less capital, while capturing over 80% of the directional exposure.

This opens the door to running a hedged equity strategy with just 5-10 ETFs or stocks, using LEAPS + option overlays.

Strategic Portfolio Shift: From 40-50 Stocks to 5-10 ETFs or Core Names

If you swap out individual stock selection for broad-based or sector ETFs, you reduce complexity without giving up on the strategy’s core benefits. Think of it as building an efficient Core-Satellite Hedged Portfolio.

Suggested Core Holdings for LEAPS-Based Hedged Equity:

By selecting 5-10 ETFs or high-quality stocks and applying the same LEAPS + call writing + put spread overlay, you achieve diversification, simplicity, and control.

How the Mechanics Change with LEAPS

Pros and Cons of Using LEAPS in a Hedged Strategy

✅ Pros:

• Capital Efficiency: Use less capital for similar exposure.

• Better Position Sizing: Easier to build a diversified portfolio.

• Defined Downside: Risk is capped at premium paid.

• Strategic Flexibility: Adjust delta, gamma, theta exposure depending on conditions.

⚠️ Cons:

• Time Decay: LEAPS still lose value over time (though slowly).

• Liquidity Risk: Not all underlyings have deep LEAPS markets.

• Complex Roll Decisions: Managing LEAPS and shorter-term calls requires planning.

• No Dividends: Unlike holding stock, LEAPS don’t collect dividends (but covered calls can replace that yield).

When It Works—and When It Doesn’t

This LEAPS-based version of hedged equity shines in sideways or choppy markets—where call premium buffers small losses, and put spreads cap deeper risk. It also allows for smart capital stacking—for example, keeping 30% in short-term Treasuries for ballast.

But in sharp V-shaped rallies, the strategy might underperform a pure equity portfolio due to short calls capping upside. That’s the trade-off: smoother ride, less moonshot potential.

Still, for volatility-conscious investors, this version makes staying invested a lot easier.

Final Take: Building a Scalable Hedged Equity Framework

You don’t need 40 stocks. You don’t need to manage a mutual fund. You don’t even need to own shares.

What you do need is a plan. One that:

• Allocates to 5-10 highly liquid ETFs or stocks

• Buys LEAPS for core directional exposure

• Writes short calls (diagonals) for income

• Buys protective puts or spreads as insurance

• Adjusts based on volatility, price movement, and probability

This isn’t about maximizing return-it’s about compounding smarter.
It’s about staying in the game, collecting rent, and reducing regret.

Probabilities over predictions,

Andy Crowder

P.S. If you want to take this approach deeper, our Wealth Without Shares service focuses entirely on building structured portfolios using Poor Man’s Covered Calls—across five distinct models, from growth to dividend-focused setups. You’ll see every trade, every update, every lesson. No fluff. Just smart mechanics, applied with consistency.

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