A Powerful Investment Strategy In Today’s Market
Five Reasons Why You Should Use This Powerful Strategy In Today’s Crazy Market
Smart Profits Issue #495
February 12, 2008
By Karim Rahemtulla,
Investment Director, Smart Profits Report
In a crazy, topsy-turvy market like this, many investors can barely afford to take their eyes off it for too long, for fear that the next time they look, the bears will have once again ravaged their portfolio.
Most don’t know where to turn for solid, profitable advice and spend too much time listening to mainstream media sources that specialize in bland, one-size-fits-all reporting and pay way too much attention to what the crowd is doing.
So at the end of yet another volatile week, separate yourself from this crowd and invest in a smarter way. Today, I’m going to show you one way to do that…
“Leap” Ahead Of The Crowd With This Pro Technique
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Most ordinary investors are perfectly content to stick with a tried-and-tested stock investing strategy. There’s nothing wrong with that, but when the market decides to lurch around like a rollercoaster, many folks end up dazed and totally confused.
They simply don’t have the knowledge that allows them to stay protected and profitable when the market heads south. Don’t be one of those guys. You can certainly do better.
As you may know, I’m very fond of using certain professional investment strategies as an alternative investment tool to just plain old stock investing. And contrary to popular myths, they’re not confusing or complicated.
I’m talking primarily about strategies like covered call options and bull spreads. But today, I want to focus on one strategy in particular that is excellent in a volatile market: LEAP options. Let me give you five reasons why…
Five-Star Protection And Profitability In A Down Market
#1: LEAPS Are Cheap: In the current market, the possibility of getting stopped out of an investment, or enduring a hefty loss is significantly increased. The whipsaw action has smashed many portfolios that I’m sure investors thought were solid.
So let me ask you this: Would you rather lose 20% or 25% of your capital with no possibility to make any money back, or have just 10% of your capital at risk, with a comfortable time cushion built in to recover any losses and still make a profit? LEAP options are long-dated securities that allow you to risk a very small amount of money up front, compared to forking out for the underlying shares.
For example, you could buy 100 Walt Disney (NYSE: DIS) shares today for $32 - a total outlay of $3,200. Or you could buy one options contract (equivalent to 100 shares) in January 2009 $32.50 LEAP calls for $2.30 - a total outlay of just $230 ($2.30 x 100).
#2: Time Is On Your Side: When you trade short-term options, time is your enemy. With LEAPS, though, you can make the same rational decisions about investing in a company that you do with stocks. But because LEAPS can expire in one, two or even three years in some cases, it gives you the flexibility to withstand a lot of adverse short-term market action. So in the Disney example above, you’d give yourself almost a year to be right while the market volatility subsides.
#3: Build A LEAPS Portfolio That Beats Stocks: Because LEAP options are available on so many companies, sectors, and ETFs today, you can build an entire portfolio of LEAPS, leave the rest of your money in a nice money market account and make more on your investment than you would with a stock portfolio.
Of course, the downside is that you’d miss out on any dividend payments. But on the upside, you can almost get a free ride on the market if you work it properly.
Here’s how: On your next stock trade, consider buying a LEAP option instead. As you’ve seen, you can save a big chunk of cash by doing so. Put the money saved that you didn’t spend on the stock into a money market account for two years. The interest you’ll get on that hefty amount may well cover a large chunk of the money you spent on the LEAP option - maybe ALL the money.
#4: You Can Go Long Or Short With LEAP Options: You don’t just have to go long with LEAPS. You can protect your portfolio from downside moves by buying LEAP put options on individual stocks or indexes without worrying about the unlimited downside risk of shorting stocks. Your downside is limited to what you paid for the LEAP option.
#5: LEAPS Are Easy To Trade: You can execute LEAP options in any type of trading account, including your IRA. They are liquid investments that provide you with a well-rounded, diversified portfolio.
To profitable investing,
Karim Rahemtulla
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Today’s Smart Profits Notes:
- LEAPS… calls… puts… if you’re unfamiliar with any of the options terms used in today’s article, or need a quick refresher, check out our one-stop Smart Profits Glossary.
Related Articles:
LEAP Options: The Pro Strategy That Provides Protection And 177% Profits
Stock Option LEAPS: Buying LEAPS Or Stocks… What You Should Do
Risk In Investing: Don’t Take Insane Risks When You Have Options
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