LEAPS and Correlation: Don't Build Five Positions That Are Really One Trade

Most traders don't blow up because they took one bad trade. They blow up because they took the same trade five times and called it a portfolio.

Here's how it happens. You build a LEAPS portfolio with AAPL, MSFT, NVDA, QQQ, and SMH. Five different tickers. Feels diversified, at least for some.

Then the market shifts, and all five drop together. Because they were never really five separate positions. They were one big position on the same thing: tech stocks going up.

This is the correlation trap. You thought you spread out your risk by picking different names. But all those names move for the same reasons.

LEAPS make this worse because they amplify moves. You're not just exposed to price changes, you're exposed to magnified price changes. So when everything drops together, it drops hard.

What Is Correlation, and Why Does It Matter?

Correlation just measures whether two things tend to move together.

A correlation of +1 means they move in perfect lockstep. When one goes up, the other goes up. When one drops, the other drops.

A correlation of 0 means there's no relationship. They do their own thing.

A correlation of -1 means they move opposite, but that's rare in real markets.

Here's the problem: correlation changes depending on market conditions.

When things are calm, lots of stocks seem unrelated. They move at their own pace. Your portfolio looks diversified.

When things get ugly, correlations spike. Suddenly everything drops together. The diversification you thought you had disappears right when you need it most.

Example of correlations from my ETF watchlist:

Why LEAPS Portfolios Get Hit Harder

Three things make LEAPS portfolios more vulnerable to correlation than stock portfolios.

Your real exposure is bigger than it looks. If you own deep-in-the-money LEAPS with deltas around 0.75 to 0.85, each contract moves almost like 100 shares of stock. You used less money to buy it, so it feels like less risk. But the exposure is nearly the same. You've just packed more exposure into less capital.

Different stocks can be the same bet. Apple, Microsoft, Nvidia, Amazon, these are different companies, but they often rise and fall together. They're all sensitive to interest rates, growth expectations, and investor appetite for risk. If you own LEAPS on all of them, you haven't diversified. You've just made the same bet multiple times.

Volatility moves together too. When the market sells off, implied volatility usually rises across all stocks at once. This can change how your positions behave and make your rolls and adjustments harder to manage, all at the same time.

The Real Test

Ask yourself this: if the S&P 500 dropped 10% over the next month, what would happen to your portfolio?

If every position would get hurt, you don't have five positions. You have one position with five ticker symbols.

That's not a criticism. It's just important to know what you actually own.

How to Fix It: Think in Categories, Not Tickers

Instead of asking "do I own enough different stocks?" ask "do I own things that move for different reasons?"

Think of your portfolio in buckets. Each bucket responds to different forces in the economy.

Bucket 1: General market exposure. Something like SPY or DIA gives you broad exposure to the whole market, not just one sector.

Bucket 2: Growth and tech. QQQ or individual tech names fit here. Most traders are already overweight in this bucket without realizing it. Limit it.

Bucket 3: Interest rates. Bond ETFs like TLT or IEF often move differently than stocks. When stocks drop because rates are rising, bonds might hold up better—or at least move for different reasons.

Bucket 4: Inflation hedges. Gold (GLD) or energy stocks (XLE) tend to do well when inflation rises. That's a different driver than what moves tech stocks.

Bucket 5: Defensive stocks. Consumer staples (XLP) or utilities (XLU) are boring. That's the point. They don't swing as hard when growth stocks get hit.

You don't need all five buckets. But you need more than one.

A Simple Process to Check Your Risk

Step 1: Calculate your real exposure. For each position, multiply the stock price by the option's delta by the number of contracts by 100. This gives you "delta dollars", roughly how much stock exposure you actually have.

Add it all up. Then look at how much sits in each bucket. If 70% of your delta dollars are in tech, you're not diversified.

Step 2: Treat correlated positions as one. If two stocks consistently move together, say, with a correlation of 0.75 or higher, treat them as a single position when you're thinking about size. You can own both, but size them as if they're the same thing.

Step 3: Set limits before you need them. Decide in advance: no more than 30% in any one bucket. No more than 50% in two related buckets combined. The specific numbers matter less than having numbers at all.

Step 4: Stress test with a simple question. If SPY drops 10%, what happens? If everything in your book drops together, you know what you're really holding.

A Quick Comparison

Portfolio A looks diversified: QQQ, AAPL, MSFT, NVDA, AMD. Five tickers. But they're all tech. They all move for the same reasons. If growth stocks sell off, you feel it five times over.

Portfolio B actually is diversified: SPY for broad market exposure. One tech position (not five). TLT for rate exposure. GLD for inflation. XLU for defense.

Portfolio B isn't trying to predict what happens next. It's built to survive more than one type of market.

One Misconception Worth Clearing Up

Some people think diversification only works if your positions are negatively correlated, meaning one goes up when the other goes down.

That's not true.

Diversification helps as long as your positions aren't perfectly correlated. Even if two things both tend to go up together, as long as they don't move in perfect lockstep, you get some benefit from owning both.

The goal isn't finding assets that move opposite. The goal is avoiding a portfolio where everything fails for the same reason at the same time.

Before Adding a New Position

Ask yourself:

• Which bucket does this go in?

• What's already in that bucket?

• How much delta exposure am I adding?

• If my biggest positions get hurt, does this new one get hurt too?

• Am I adding something new to the portfolio, or just more of what I already have?

If it's more of what you already have, that's fine. Just size it accordingly.

The Bottom Line

A five-position portfolio that's really one trade is fragile.

A smaller portfolio built on genuinely different drivers is sturdier and easier to manage. It's also more likely to survive the year when the market does something you didn't expect.

Correlation doesn't warn you. It just shows up when you have no room for error.

Build your portfolio like you expect the rules to change.

Because eventually, they will.

Probabilities over predictions,

Andy Crowder

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Disclaimer: The Option Premium provides educational content about systematic options strategies based on probability and risk management. This is not investment advice or a recommendation to buy or sell any security. Options trading involves substantial risk of loss and isn't appropriate for every investor.

All trade examples shown are for educational purposes only, they represent real positions but are illustrative of process, not promises of performance. Your results will differ based on timing, execution, market conditions, and individual decisions.

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