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Long-term Equity Anticipation Securities or LEAPS are basically long-term options that allow an investor to capture much of the price movement of a security with a greatly reduced investment.
A LEAP option can allow up to 24 months of time for investor speculation although we normally utilize only a portion of that time in the LEAPS Trader.
LEAPS options expire in January of each year but can be purchased and sold at any time.
A LEAP option has a stated strike price usually in $5 increments corresponding with the price of the underlying security.
Basic LEAPS Concept
We will use Microsoft (symbol: MSFT) as an example.
Pretend MSFT is in an up trend and you want to make a bullish bet on it.
Currently shares of MSFT are trading near $42.00 (as of March 10, 2015).
The prices for January 2016 and 2017 LEAPS options are shown below.
Jan-2016 $40 call is $4.20 while the Jan-2017 $40 call is at $5.85
Jan-2016 $45 call is $1.81 while the Jan-2017 $45 call is at $3.70
Jan-2016 $50 call is $0.69 while the Jan-2017 $50 call is at $2.63
With LEAPS your risk is limited to the price you pay for the option but unlimited as to potential gains.
Using the MSFT example above you can see that buying the Jan-2017 $50 LEAP for $2.63 would give you almost two years of price
appreciation potential for MSFT for a very modest price (remember, this scenario is assuming a bullish bias on MSFT stock).
Just like normal options, with LEAPS everything is priced in 100 share lots. Using the MSFT Jan-2017 $50 LEAP at $2.63 it would cost
you $263 plus commission. That is your total risk for the rest of the trade. If MSFT fell to $20 and your LEAP expired worthless your total cost would still only be $263.
Your upside potential is unlimited. Should the economy explode and MSFT run to $65 over the next two years the Jan-2017 $50 LEAP
could rise to $16 or more in value, $1,600 per LEAP contract. You only paid $263 (this is just an example).
At expiration in January-2017 you have the option to sell the leap outright for any gain in price or exercise the LEAP and own the stock at $50.
It is your choice, you are in control.
LEAPS are a very conservative investment but they still have risk, which is limited to your investment. Your risk is that the stock will not rise over your strike price during the remaining time period.
Your risk is greater the farther away from the current stock price you chose to purchase a LEAP. For instance, purchasing a $40 LEAP on GE would be a fairly safe bet but purchasing a $70 leap would be foolish. The odds of GE doubling in price over the next two years are far less than simply increasing $10. Your actual cash at risk would be much less at $70 with the LEAP costing only about $0.10 ($10 per contract) but the odds of the $70 price being reached are very small.
Investors must weigh their anticipation of gains in the stock price against the price of the various strikes when determining which strike price to purchase.
There are multiple strategies we employ at LEAPS Trader to reduce our cost in the position and in some instances the final cost will be zero. Highly volatile stocks will carry higher premiums than the GE LEAPS profiled above. This is due to the greater chance of a larger move in the stock price. In LEAPS a low price is not always a better investment and most times a high price is also less desirable. We endeavor to find the LEAPS at the right price to produce a high probability of profit.
LEAPS have a lifespan of up to two years but we will seldom hold a position for more than 4-6 months. Normal markets cycle every month or so with alternating periods of buying and selling. In the rare case where a market does maintain a positive trend for months we would also retain our positions until that trend breaks.
We view LEAPS as the equivalent of investing in the stock. We do not "trade" our positions but invest in stocks with the potential of making a decent move. We would tend to avoid very high volatility stocks due to the high cost of the LEAPS and the unpredictable trends.
LEAPS Trader strives to produce repeatable profits of 50% or more on every position. With an average life span of 4-6 months this will allow investors to double the money they have in LEAPS each year. We do not recommend that investors allocate all their funds to LEAPS but only that portion of their funds considered as risk capital. We try to minimize risk whenever possible but as in any form of investing there is always risk.
LEAPS Trader will strive to maintain a portfolio of 10-15 positions in positive market cycles and as few as five positions in negative market cycles. The portfolio size will range from $7000 to $12000 for one contract of each. No investor is obligated to enter any position and should only enter those that appeal to them personally. Investors with a larger capital base can increase the number of contracts per position.
Ideally we want to enter LEAP positions on a pullback in the market/stock. In some cases we will enter on breakouts when the market refuses to cycle. By waiting for market cycles this gives us a cheaper price and many times a lower strike on the LEAPS. It also gives us a safer entry in terms of risk.
New plays are normally entered from the potential targets on our "Watch List". The Watch List will contain from 4-12 potential stocks that we are interested in owning if our price target is reached. Each stock will have and price target that serves as an entry trigger for the suggested LEAP. You will always know in advance what stocks we are targeting, the entry price trigger and the suggested LEAP for that position.
New plays are sometimes produced by news events in stocks that are not on the Watch List. If a news event occurs that produces a buying opportunity it will be highlighted in the newsletter or by email if necessary. Again, we do not trade LEAPS but view them as a reduced price short-term stock investment. As such we sometimes enter positions when everyone else has lost interest in the stock.
Generally the majority of our LEAP investments will be in LEAP Calls. We will periodically enter some positions on LEAP Puts but only on rare occasions. Should the market develop a downward bias we will increase the ratio of puts to calls but the majority of our emphasis will be on stock picking not trading the market. As a rule the majority of investors only invest on the LONG side of the market. We would rather wait patiently with the majority of our capital safely on the sidelines in times of market stress in order to be ready for the next bounce when it occurs.
The game plan is to double our capital each year and that requires patience and restraint in times of market stress and the willingness to enter positions in volume when the time is right.
The results posted for the LEAPS Trader are hypothetical. The performance numbers shown are based on trades subscribers could enter based on
our guidelines. They are based on the price when the play was initiated by LEAPS Trader, and the price when dropped by the LEAPS Trader.
LEAPSTrader.com cannot guarantee that any person bought or sold the actual security or option for the prices listed in the newsletter,
or on the Web Site. The entry price listed in the newsletter and on the Web Site for the Leaps Portfolio is the option price at the time
the stated entry criteria for the play is met. The exit price listed is the option price at the time the stated exit criteria for the play
is met. In the event the play is entered or dropped by the newsletter without the entry/exit criteria being met the closing price for that
day will be used. Investors may receive greater or lesser returns based on their trading experience, timing of trade entry/exit and market
price fluctuations. The prices listed are for reference only and are in no way intended to represent an actual trade, entry price or exit price.