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LEAPS Call Option
The Smart Profits Report: Issue #159
Thursday, November 11, 2004
LEAPS Call Option: How to “Swap” LEAPS Call Options For 300% Returns
By Karim Rahemtulla
Chairman, Mt. Vernon Research
The trading patterns in the market following the elections point to quite a finish for 2004. That’s not good news for options investors… IT’S GREAT NEWS. Whenever we get volatility up or down in the market, there’s money to be made. What’s different this time is that the rally is broad, touching almost all sectors. Energy is hot… gold is shining… tech is rebounding sharply, along with many industrial sectors.
If you haven’t explored or used options, there is no better time to get started. That goes for options in general, including: LEAP Call Options, LEAP Put Options and Long or Short Covered Calls. Pay special attention to the first item on that list: LEAP call options…
If you’ve never executed a portfolio swap using LEAP call options (the colloquial term for LEAPS - Long-Term Equity Anticipation Securities - call options), you definitely want to consider it now…
With this one simple LEAP call option trading technique, you can take 90% of your money off the table and still reap 300% returns if your position continues in an up-trend.
Tripling Your Money With 90% LESS RISK
For example, let’s say you bought Exxon last year in the $30s. Now that Exxon is at $50, you may want to consider swapping your shares for LEAP call options. You can cash out and take your profits on the shares, but continue playing any remaining up-trend in the company with your LEAP call options - reducing your risk significantly in the process.
Here’s what I mean…
Say you own 2,000 shares of Exxon. Right now that 2,000 shares is worth $100,000 - so you are up more than $30,000 from last year.
You could ride it out and hope that the energy sector and Exxon keep powering ahead, or you could take most of your money off the table, pocket the $30,000 and reinvest a small percentage into some LEAP call options on Exxon.
First you need to set a target price and a stop loss.
Let’s start with a target price….
- Again, Exxon is at $50 right now. Let’s say your target for Exxon over the next two years is $65, about 15% a year (remember, it has moved up almost 50% in just one year, so we are not way out of line with our assumption).
- Your upside if Exxon hits $65 is $30,000.
Now let’s take a look at the possible downside to holding Exxon stock…
If the stock begins heading south, how much are you willing to lose before you liquidate your position? What is your point of maximum pain? How much of that $100,000 stock holding are you willing to put at risk?
Some people recommend a 25% stop loss, others 10%. For the sake of this example, let’s use 15%. If that’s the case, you are willing to risk $15,000 on this play…
LEAP Call Options, a Proven Technique… And a Good Night’s Sleep
Now let’s look at how LEAPS can put you in a position of profits - and easy sleeping.
If you sold your stock position and bought the Exxon $50 LEAPS that expire in just over two years, you would spend about $10,000. You just took $90,000 off the table.
That $90,000 is in a money market account earning 2% a year, bringing in about $3,600 over two years. That $3,600 reduces your cost in your Exxon LEAP options position to around $6,400.
If Exxon goes to $65, then you would make $10 on each contract of Exxon, or about $20,000 (300%) profit on your $6,400 investment.
So, let’s review…
- Hold the stock and make $30,000 on $100,000 invested…
- OR hold the LEAP call options and make $20,000 on $6,400 invested…
If this type of investing appeals to you, then it is time to scour your portfolio for possible swap trades. This kind of technique will become increasingly profitable should the market continue to recover into the new year…
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- For a definition of “LEAPS” or “call options“, visit our Smart Profits Glossary.
- If you want ultra-timely recommendations and ideas, check out my fast-paced trading service that will steer you toward the best LEAP call options trades available today. For more information about how volatility affects us as option traders, check out Smart Profits #107 - Market Volatility: How to Pay $27 for a $50 Stock.
Related Articles:
- Making 30% While Others Make 3% - On the SAME Stock
- How to ‘Own’ Almost Any Stock for Pennies on the Dollar
- How to Grow Rich From Your Options Losses
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