During this great bull market run, have you ever
thought about buying
stock options which don't expire for a long time?
By holding long-term
options, you have the potential of tapping into
the bull with a minimal
investment. I am talking about LEAPS. The term
LEAPS is short for
Long-term Equity AnticiPation Securities (they
really had to stretch it to
get the "P"). For most practical purposes, LEAPS
are simply long-term
options that expire in January. That's it! They
are options that don't
expire for at least 9 months. In fact, once
their expiration gets closer
than 9 months away, LEAPS lose their moniker and
become normal options.
They even give them a new ticker symbol.
So, how about an example using LEAPS? We wrote
about a LEAPS position
that we thought was a good play back on December
12, 1998. Let's take a
look at how that LEAPS position is doing 13
months later. The stock was
Cisco Syste ms (CSCO, $108). Cisco closed Friday
December 11, 1998 at
$83.50 (pre-split). At that time you could buy
the January 2001 LEAPS
with a strike price of $80 for $26. What does
this mean? It means that
by the third Friday in January 2001 Cisco must be
trading at $106 ($80 +
$26) for you to break-even on this trade.
However, for every $26 Cisco is
trading above $106 you would make 100% return on
your money. In other
words, if Cisco is at $132 you have a double;
$158 a triple and $184 a
4-bagger.
However, on June 22, 1999, Cisco's stock split
2-1. This means that for
each of those January 2001 $80 Leaps mentioned
above that were purchased
in December of 1998, is now 2 $40 Leaps. It also
means that your
break-even point post-split is $53. Cisco is now
trading at $107 and
those January LEAPS (now strike price $40) are
trading at $70. Therefore,
every $2,600 invested in the LEAPS on December
11, 1998 is now worth
$14,000. And, there is still one more year to go
on these contracts.
Yes, LEAPS are powerful! [Ed. Note: So is
Cisco!]
To learn more about LEAPS, click on the link I
have provided at the end of
this paragraph. It is a link to a free video
that you can receive from
the Options Industry Counsel which is comprised
of the four participant
exchanges and The Options Clearing Corporation.
It was formed to enhance
the acceptance of equity options by brokers and
individual investors and
to promote the use of options products. To
accomplish its goals, the OIC
sponsors a wide range of marketing, media
relations and educational
programs, including the free video that I
mentioned.
LEAPS video:
optionscentral.com
Knowledge is power!
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