Originally Posted by Trip7

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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