Originally Posted by
JamesBond
Buying those is a bullish strategy. So you believe that the stock is going up, would you agree? Why do you prefer buying LEAPS rather than selling puts outright? If you look at Aug 20 CSX, ($95) the $80 calls will cost you ~$17. The $80 puts go for $.40. The stock can lose well over 15% before I have to 'worry' about going long, annnnnnd, even if I did I will be getting it at a 15% discount from present value whereas you will have $1700 tied up and the stock MUST go up for you to see the first penny of profit. If you are buying, what difference does it make how far below the current NAV you go. You are still depending on a stock move to the upside before you can make any profit. Why not go down to 50%? Lastly,, form your article, LEAPS is just a fancy marketing moniker. It says right there that they are little more than options with long term horizons.
I'm a long term investor. With a Long Equity Anticipation Securities (LEAPS) strategy, I can take a stock that I have conviction is strongly undervalued ie BABA, and from the additional leverage receive greater gains. Moreover, with LEAPS generally being 12+ months expiration, it's tax efficient at 15% capital gains.
Thru buying a deep ITM LEAPS, the stock does not have to advance far before you are ITM. Combine that with a stock that's is already deeply undervalued, the odds are now stongly in your favor for principle protection. It is a tenent of my investing style, when it comes to stock selection, that maximizing the upside means first and foremost, minimizing the downside. Why not go down to 50%? Because the stock should already be deeply undervalued providing downside protection. Furthermore, at least 20% ITM provides premium protection as the price of the stock is at or nearly at break even.
As you can tell, my best LEAPS idea is BABA. Currently trading at $212. After analyzing the company's fundamentals and cashflows my conservative valuation is $320. Using a LEAPS strategy, the JAN 20 23 $170 call will cost around $6100 per contract. Stock only needs to advance to $231 to breakeven. If the stock reaches my conservative fair value:
Per Contract-
Premium Cost: $6100
Equity Cost: $17,000 ($170x100)
Total Cost: $23,100
Equity Value: $32,000($320x100)
$32,000-$23,100= $8900 profit on $6100 investment for a 146% ROI vs 51% ROI from just purchasing the equity instead of LEAPS. Moreover in the case of BABA, $320 would such a conservative valuation that I would keep the stock and let it compound further making my total acquisition cost $231($23,100/100) a share.
LEAPS allow me to achieve large returns typically gained from Nano, Micro and Small Cap stocks with larger, established companies that are undervalued.
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