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Take a Leap Into Leaps | The Mesh Report

Take a Leap Into Leaps

John Thomas February 28, 2017 Comments Off on Take a Leap Into Leaps

Over the past half century, I have been asked every question under the sun about the financial markets.

Since the advent of the Brave New World on November 8th, and the parabolic move in share prices, I have been asked one question in particular.

What do you think about LEAPS?

LEAPS, or Long Term Equity Participation Securities, are just a fancy name for a stock option with a maturity of more than one year.

You execute orders for these securities on your options online trading platform, pay options commissions, and endure option like volatility.

Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years worth of stock gains for a fraction of the price.

While these are leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined.

Interested?

Currently, LEAPS are listed all the way out until January, 2019.

However, the further expiration dates will have far less liquidity than near month options, so they are not a great short term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.

These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, SEP, or IRA.

Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities can be astronomical.

Like all options contracts, a LEAP gives its owner the right to “exercise” the option to buy or sell 100 shares of stock at a set price for a given time.

LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).

To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.

If a LEAP expires “out-of-the-money” –  when exercising, you can lose all that was spent on the premium to buy it. There’s no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.

LEAPS are also offered on exchange traded funds (ETFs) that track indices like the Standard & Poor 500 (SPY) and the Dow Jones Industrial Average ($INDU), so you could bet on up or down moves of the broad market.

Not all stocks have options, and not all stocks with ordinary options offer LEAPS.

Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or “writer”, of the LEAPS contract until the LEAPS owner exercises.

Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.

They offer more margin and more efficient use of capital than traditional margin accounts.

And for a moderate increase in risk, they present outsized profit opportunities.

For the right investor they are the ideal instrument.

Let me go through some examples to show you their inner beauty.

By now, you should all know what vertical bull call spreads are. If you don’t, then please watch this video tutorial .

Yesterday, Apple (AAPL) shares closed at $136.93.

Now lets leap into LEAPS.

We’ll start out with a conservative position, like the January, 2019 $120-$130 vertical bull call spread. In this position you want to:

Buy 1X January, 2019 $120 calls at ………………………….$27.00
Sell short 1X January, 2019 $130 calls at………………….$21.08
Net Cost………………………………………………………………….$5.92

This is a bet that Apple shares will close above $130 at the January 18, 2019 expiration (I should live so long!).

On expiration, the position you paid $5.92 for is now worth $10.00, giving you a two year profit of 68.91%.

This is the money you make, even if Apple moves sideways, or FALLS  by less than 5.10% over the next 23 months. Your breakeven point in the shares is $124.08.

Let’s say that you are bullish on the two-year outlook for Apple shares based on their continuing stream of new iPhone launches. You want to get more aggressive.

You need to roll up the strike prices and buy the January, 2019 $140-$150 vertical bull call spread.

In this position you want to:

Buy 1X January, 2019 $140 calls at ………………………….$16.50
Sell short 1X January, 2019 $150 calls at………………….$12.48
Net Cost………………………………………………………………….$4.02

The position you paid $4.02 for is now worth $10.00, giving you a two year profit of 148.7%. This is the money you make even if Apple moves up +9.54% or more over the next 23 months. Your breakeven point in the shares is $144.02.

Now it gets REALLY interesting.

Let’s say that you are very bullish on the prospects for Apple shares.

You think that not only the coming product stream is stellar, you also believe that repatriation of some $250 billion of foreign capital will be used by the company to buy back huge amounts of their shares.

You positively must buy the January, 2019 $180-$190 vertical bull call spread.

In this position you want to:

Buy 1X January, 2019 $180 calls at ………………………….$4.50
Sell short 1X January, 2019 $190 calls at………………….$3.18
Net Cost………………………………………………………………….$1.32

On expiration, the position you paid $1.32 for is now worth $10.00, giving you a two year profit of 657.57%.

This is the money you make even if Apple moves up +38.75% to $190 over the next 23 months. Your breakeven point in the shares is $181.32.

In other words, you make 19.55 times more than you would earn than if you owned Apple shares outright.

Now you know why hedge funds, institutions, and sophisticated high net worth individuals find LEAPS so attractive.

Want to know what John Thomas REALLY thinks?

Click here for a free global strategy webinar giving John’s 2017 outlook on stocks, bonds, foreign exchange, commodities, energy, precious metals, and real estate, and YOU TOO can make 38% a year!



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