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Strategies & Market Trends : Giant LEAPs... -- Ignore unavailable to you. Want to Upgrade?

To: ken whited who wrote (242)	12/1/1997 10:32:00 PM
From: Randy Schmid	Read Replies (1) \| Respond to of 315

Hi folks. I've been on several of the options boards and have been cooking up variants of established strategies, some good, some not. I've started a strategy with Conseco that involves buying 2-yr LEAPS at the money, and holding while the stock oscillates upward - in this case about 20%. I then leg in to a bull spread, selling a 10 pt higher strike for the same money (got CNC 2000 40s at 10 3/8 in Sept, will sell a 50 against them tomorrow for about 11). If I'm understanding this correctly, a few observations follow: 1. I get my original investment back out - I own the 10 pt spread for free. If CNC winds up above 50 in 2 yrs, I make $1000 per contract. 2. If I've got this right, my brokerage (Waterhouse) will not charge me margin interest, since the criteria is cost of the spread (none) or maximum loss if both sides are exercised (none). 3. I gain downside protection against the LEAPS I own - if stock pulls back significantly, I can "leg out" of the sold higher strike LEAP by buying it back in. I can then sell it again when it reaches its original price of sale. 4. The original investment can be used to fuel further speculation on CNC. This looks like an interesting phenomena - you start out with an initial investment, and if the stock does well, you complete a bull spread and start another with that original investment money that's been pulled out. You repeat this process as often as possible, and when new 2 yr LEAPS become available, you can keep doing it. The net effect is that if the stock keeps moving up, you keep getting more 10 pt spreads for free. Thus the downside is always limited to the original investment amount. Stocks that do great create a large number of positions (all owned for free); stocks that don't do so great don't. Thus the amount of free spreads owned is proportional to the stock performance. This looks like an interesting way to limit risk while not missing out on a stock's movement. 6. If the stock keeps going up, the earliest free spreads will get pretty deep in the money, and it may be time to close them out before the sold LEAPS are at risk of assignment - which is fine, since you'll probably get close to the 10 pts at expiration in '00 7. One downside - its a heck of a lot of selling and buying back that will take place in early January if you're successful! The LEAPs are a unique way to do this - the long time frame allows you to explore this approach in a less harried way than would regular options. I would start with a stock that has an established base (like CNC was at 40), or one you're confident is headed up based on fundies or techies. This may be an excellent way to profit handsomely from stocks that consistently deliver 20%/yr. Comments or suggestions? TIA Randy