Greg, I dusted some old articles and found one about LEAPS and here it is.
I don't have LEAPS but hope this helps.
Good Luck.
LEAPs, which debuted on the Chicago Board Options Exchange in October 1990, are finding their way into more portfolios.
Long Term Equity AnticiPations are used to boost performance while helping to control risk.
For example, rather than buying 100 shares of Microsoft at 87, investors can control 100 shares by purchasing a Microsoft 85 LEAP call, which expires in January 1997. To buy the stock, an investor would need $8,700. To buy the LEAP, he would need just $1,500.
Invest the difference - $7,200 - in U.S. government bonds, and the overall position becomes a convertible debenture. Put another way, the LEAP represents the equity kicker and the U.S. government bond becomes the income component.
Another way investors use LEAPs is to enhance their yield by selling LEAP calls against stock they already own.
This tactic gets an investor an upfront premium from the LEAP buyer. At the same time, the strike price of the LEAP defines a potential sale price for the underlying stock.
Subtract the premium received from the cost of the stock, and the investor reduces his cost base, and by extension, his risk.
LEAPs now trade on 166 stocks. Daily volume this year is averaging 18,760 contracts, a 25% increase from a year earlier.
What investors are discovering is that LEAPs are more than just long-term options.
Harrison Roth, senior options strategist at Cowen & Co. in New York, said, ''Because LEAPs have a longer life expectancy, they behave, for the better part of their lives, in a strikingly different manner from short-term options.'' Time, he said, is not as critical a variable in the price of the LEAP.
The price action of LEAPs more closely mirrors the performance of the underlying stock. That's a distinct advantage over traditional options, which have a frustrating tendency to move independently of the underlying stock.
Institutions are increasing their use of LEAPs to manage risk within their portfolios. The most common risk reduction tactic is covered- call writing, which involves selling an option to collect the premium income while still owning the stock.
Other institutional strategies also make sense for the individual portfolio.
The concept of stock replacement is another example. The idea is to replace stock already in a portfolio with LEAP calls.
Most investors holding stocks that have risen dramatically are tempted to sell and protect their profits. LEAPs provide an alternative, allowing investors to sell the stock and replace it with LEAP calls.
For example, with IBM trading at 92, investors holding the stock at a profit could sell the shares and use part of the proceeds to purchase IBM 100 LEAP calls that expire in January 1997.
The cost of IBM LEAP calls is about 91/8. With a stock replacement strategy, the investor secures a profit and maintains a position in the underlying security, should it continue to rally.
Another strategy that has merit in an individual portfolio is one that Roth refers to as ''surrogate therapy.''
The idea is to buy deep in-the-money LEAP calls that are trading at a small premium to the underlying stock.
Roth cites Philip Morris Cos. as an example. With the stock at 735/8, Roth suggests the Philip Morris 40 LEAP calls, expiring in January 1997, and offered at 331/2.
The Philip Morris 40 LEAP calls are trading at a 13-cent premium over their intrinsic value, which is the difference between the current stock price and the strike price of the LEAP calls.
''It's the same as buying Philip Morris on margin, without the margin interest costs,'' Roth said.
A more complicated approach is to buy half the stock position while simultaneously selling an out-of-the-money LEAP call and out-of-the-money LEAP put.
Intel Corp., which has doubled this year, presents an opportunity for this strategy. Investors who remain bullish on the outlook for Intel should buy half the stock at 114 and sell the Intel 135 LEAP and the Intel 100 LEAP. Both LEAPs expire in January 1997.
''If you buy the stock for cash and place it in a margin account, you can borrow against the stock, have no debit balance, no margin interest and the long stock collateralizes the short put,'' Roth said.
This covered-combination nets the investor about $2,100 in premium income, which effectively reduces the cost of buying the initial stock from $116 a share to $95.
The investor is obligated to deliver the stock to the call buyer at $135 a share, or $40 above the per-share cost to establish the position. If the stock is called away in January 1997, the return is better than 42%, or 25.7% annualized.
The short LEAP puts obligate the investor to buy additional shares - 100 additional shares for every LEAP put written - at $100 a share until the January 1997 expiration.
If the LEAP puts are assigned, the investor would end up with twice the number of shares at a net cost per share of $97.50 ($95 net cost for initial position plus $100 a share should the LEAP puts be assigned), or $18.50 below the current market price.
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Copyright (c) 1995 Investors Business Daily, All rights reserved.
Investor's Business Daily - Investor's Corner (06/07/95)
Trading Strategies Using Popular LEAPs
By Richard Croft
Transmitted: 95-06-07 21:31:57 EDT (aaabsbyq) |
