PoetTrader,
Any thougths re: LEAPS?
I think LEAPS are especially attractive if you believe this market will find a bottom and recover in the time frame the LEAPS will remain open, or if you think it is headed much lower. A bullish strategy is the obvious one of purchasing out of the money calls at low prices, but to make money the stock must appreciate enough to reach your breakeven point (strike price plus the premium you pay) and then some. The obvious bearish strategy is to buy puts, but I would not be inclined to outright buy LEAPS puts with the market at these levels except as a surrogate for shorting stock expecting to take profits if we make another dive.
For a long term bullish outlook, LEAPS calls are a safer way to invest your money than stock ownership, as long as you don't commit too much of your capital to the LEAPS. Let the leverage work for you and keep some cash in reserve. That way your maximum loss is always known and can be kept to a relatively small % of your total capital. If you buy now and things go seriously down in the next few months, consider trading in 2003 LEAPS for 2004 LEAPS at a lower strike and fewer contracts without putting up a lot of new money. I did this with a couple of stocks I think will recover over then next couple of years, but went through some hard times. I now own 2003Jan5 of KM and CPWR after trading in 2002Jan10. I took a loss on the 2002, but the 2003 have some promise of getting me a net profit.
A more conservative bullish approach that can still bring some nice returns is a bull spread. Here is one example of a spread I put on NT on March 28 when it got clobbered the last time. I bought a 2003Jan10 for 7.60 and sold a 2003Jan20 for 3.90, a net debit of 3.70. At the time, NT was selling for about 14.00, and my breakeven point was 13.70. If I do nothing, and if NT makes it over 20 by Jan 2003, I will make a profit of 6.30 on a 3.70 investment, for a return of 170% in 21 months. Of course if NT goes below 10, I lose it all instead of only 30% or so like the stock buyers will, but time is on my side. If NT makes a serious dip from here, I can buy back the 2003JAN20 hoping to get a chance to sell that again higher, or just let the 2003Jan10 ride for then unlimited upside potential. A similar example: in early October when AAPL got crushed I opened a 2002Jan25x35 bull call spread for a net debit of 2 7/8. AAPL wound up a lot lower than I thought it would ever go, but that gave me the chance to buy back the 2003Jan35 for 1 1/16. I now have the lonely 2002Jan25 at a net cost of 3 15/16 bidding at 5.20 today. Hopefully AAPL will see 30 before this little rally is over, and I will sell something to take money off the table and still leave some upside potential.
A similar approach preferred by some seasoned options traders is to do the bull spread with puts. To do the NT 2003Jan10x20 call spread at the best current prices would cost 4.10, leaving 5.90 possible gain. Selling the 2003Jan20 put and buying the 2003Jan10 put would give you a credit of 5.45, leaving a worst case loss of 4.55. I'm a bit more comfortable with calls, but I'm not the smartest options guy around here. Some of the real pros like the puts better.
There are numerous cases where you can make a profit of 30% or so by Jan 2003 even if the stock does not go up at all. Look to sell LEAPS calls at the money, or a bit out of the money where the time premium is rich. The higher premium for in the money calls is mostly intrinsic value, so you actually pay less for time value, leaving you with a position that will increase as time value erodes as ling as teh stock does not drop.
The downside of this spread strategy is that you don't see your value increase much in the near term, even if the stock does fairly well. If it really runs up fast, you can take a lesser profit earlier, which might be prudent, but in times like these where there is still high risk of a major decline, investing maybe 20% of your money into some of these spreads and keeping 80% in much safer places looks pretty good. If 20% of your money makes 100% return, and the other 80% makes 5%, you still make 24% overall. If you lose your 20% and still make 5% on 80% you are only down 16% and are still alive to make gains when the sunshine returns.
Dan |
