LEAPS and Bear Markets

Bear markets are where LEAPS traders either get destroyed or set up their best trades. The key is knowing which strategies apply in each phase: the initial decline, the capitulation, and the recovery.

Phase 1: The Early Decline (Market Down 5-15%)

The market has pulled back but nobody knows yet whether this is a correction or the start of a bear market. IV is rising.

If you hold LEAPS calls: Do not panic-sell unless your fundamental thesis has changed. A 10% stock decline means your LEAPS is down roughly 25-30% (because of leverage), but you still have 12+ months for recovery.

Tactical moves:

  • If you are selling short calls against LEAPS, increased IV makes those short calls more valuable, partially offsetting long-side losses.
  • Avoid buying new LEAPS calls here. IV is elevated.
  • Consider buying LEAPS puts on SPY or QQQ if you believe the downturn has further to go.

    • Phase 2: The Deep Decline (Market Down 15-30%)

    This is bear market territory. Fear is high, IV is elevated, and many LEAPS call holders have seen significant losses.

    LEAPS puts purchased earlier are now highly profitable. Consider selling some to lock in profits.

    LEAPS calls are deeply discounted. The best time to buy LEAPS calls is when nobody wants them. But timing the exact bottom is impossible.

    Dollar-cost averaging approach: Allocate capital to buying LEAPS calls on high-quality stocks at monthly intervals during the decline. You will not catch the bottom perfectly, but your average entry will be substantially better than buying before the decline.

    Phase 3: The Recovery

    Markets recover. They always have historically, though the timing varies from months to years. This is where LEAPS calls bought during the decline produce outsized returns.

    Historical context: After the 2020 COVID crash, the S&P 500 recovered to pre-crash levels in roughly five months. LEAPS calls bought near the bottom in March 2020 with 18-24 month expirations returned 200-400%+.

    After the 2022 bear market, recovery took longer (roughly 18 months to new highs), but LEAPS calls bought in October 2022 still produced 100-200% returns.

    Bear Market LEAPS Strategies

    Strategy 1: LEAPS puts for profit Buy LEAPS puts when the market is near all-time highs and complacency is high. VIX below 14 often signals cheap protection. If a bear market develops, these puts can multiply in value.

    Strategy 2: Bear market LEAPS calls (contrarian) After a significant decline (20%+), buy deep ITM LEAPS calls on blue-chip stocks or SPY. You need 18-24 months for recovery to play out. This is a high-conviction bet that the market will be higher in two years.

    Strategy 3: LEAPS collar If you hold existing stock positions through a bear market, buy LEAPS puts and sell LEAPS calls to create a collar. The put provides downside protection, and the call sale helps pay for it.

    What NOT to Do with LEAPS in a Bear Market

    Do not buy OTM LEAPS calls trying to catch the exact bottom. If the market stays depressed for a year, they can expire worthless even if the stock eventually recovers.

    Do not sell your LEAPS puts too early. Bear market rallies feel like the bottom is in, only to resume the decline. Scale out gradually.

    Do not ignore IV. A LEAPS call that costs $35 during a low-IV market might cost $55 during high-IV conditions. You are paying 57% more for the same position.

    Sizing Positions in Volatile Markets

    During bear markets, reduce position sizes to 3-5% per position. You need to survive the drawdown to benefit from the recovery. Track your LEAPS portfolio through the cycle with OptionsPilot, which monitors delta exposure, time decay, and overall P&L across all your positions.