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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Wyätt Gwyön who wrote (3932)7/17/1999 2:18:00 PM
From: Mike Buckley  Read Replies (3) of 54805
 
Greg made some great points about LEAPS. (By the way, the acronym is both the singular and the plural. You buy one LEAPS or two LEAPS. :)

I am also no expert on LEAPS but I do have a lot of information provided by a couple of experts who have used LEAPS very judiciously over recent years. They are a husband-and-wife team who have used the strategy of augmenting their long positions with the leverage LEAPS provide.

Their strategy is to buy LEAPS that expire as far into the future as possible. That's in keeping with their long-term investing philosophy. LEAPS that expire 2 1/2 years later are the longest-term form of speculation. As a result, they tend to buy in May when the January LEAPS that expire 2 1/2 years later become available.

Their selling strategy is to look very closely at the situation when the LEAPS become regular options, meaning when it's about nine months prior to expiration. Their experience is that the premium tends to begin erode more quickly at about that point in time. Having bought the LEAPS about 1 1/2 years earlier, the long-term capital gains tax is applicable. If they still like the fundamental prospects of the company, they use the proceeds of the sale to buy more LEAPS 2 1/2 years out.

Greg, you mentioned that LEAPS are available in retirement accounts. Though it's not unheard of, that's not my experience on a regular basis. As an example, Ameritrade only allows covered calls in retirement accounts. I'd be interested in knowing about brokerage firms that do allow option trading in retirement accounts.

You also mentioned that options can only be purchased with cash. If that's the case, it's purely a matter of accounting. As an example, I recently bought some Q LEAPS in a taxable account in which there was no cash. In the brokerage's way of looking at it, they might account for the margin as being applicable only to the stocks in the account. Regardless, I didn't have any cash in the account and the LEAPS were immediately purchased, much to my good fortune. :)

--Mike Buckley
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