Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : WCOM -- Ignore unavailable to you. Want to Upgrade?

To: Srexley who wrote (6928)	6/28/2000 8:06:00 PM
From: Jacob Snyder	Respond to of 11568

re: Why is it better to buy leaps out of the money? It's not better, just a different place to be positioned on the risk/reward continuum. I usually buy longest-term LEAPs for safety, so I can be wrong for a year, or two, and still be right eventually. I pay less time premium (per month) also. For LEAPs, I try to pick companies whose stocks have a good potential to double over the life of the option. That usually means a company reliably growing EPS at 20%+/year, and with a likelihood of PE expansion as well. For instance, I bought MSFT LEAPs on 5/31, 80 strike price, when the stock was at 62. If the stock doubles, then strike prices 20-40% out-of-the-money give the highest return. Buying in-(or-at)-the-money furthest-term LEAPs, in quality companies, is the least risky option strategy. Since options are inherently risky, this is a very reasonable strategy. At the present moment, with the possibility of a recession in 2001, and the market PE way above the top end of the historical range, your logic is not flawed. Buying deep-in-the-money LEAPs means they are essentially a proxy for the stock. The potential for reward (and the potential for losing your investment) is less than with my strategy (out-of-the-money LEAPs). If the stock doubles or better in the next three years, my investment will have a much better return than yours. On the other hand, if the stock goes nowhere for the next three years, you will be able to recover much of your original investment, while I lose all of mine.