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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Jean M. Gauthier who wrote (13889)	1/6/1999 12:02:00 PM
From: PMS Witch	Respond to of 74651

"Can someone explain to me how buying a LEAP would help me add to my position of MSFT stock, without having to shell out $15000 for 100 shares?" Just guessing here, but IF your leap BOTH expires deeply in the money, AND the underlying security splits before expiration, your profits may be sufficient to purchase 100 shares. Hope this helps, PW.

To: Jean M. Gauthier who wrote (13889)	1/6/1999 6:18:00 PM
From: Gerald Walls	Respond to of 74651

Can someone explain to me how buying a LEAP would help me add to my position of MSFT stock, without having to shell out $ 15000 for 100 shares? In order to exercise your option to buy at the strike price you always have to pay the strike price. However, if you buy a deep-in-the-money LEAP you have a security that cost considerably less than the stock and will perform better than the stock, percentage-wise but not point-wise, if the stock appreciates substantially. In effect you have a position in the stock through the LEAP for a fraction of the cost of the stock. Later you can roll the LEAP into a LEAP with a higher strike and buy more or remove some of your gains.

To: Jean M. Gauthier who wrote (13889)	1/7/1999 1:49:00 AM
From: ed	Read Replies (1) \| Respond to of 74651

Well, the strategy of buying leap is to bet on trend without risking on those day to day fluctuation . So, you buy out of money leaps( premium is low ) from time to time to add on your holdings. Based on the past history , and future prospect of the company, the assumption is by the end of year 1999, MSFT will hit $300, and $600 by year end of 2000, and say you are holding 10000 shares of MSFT in your account. Say today, the closed price of MSFT is 151.25. So, the year 2000 , $190 strick leap maybe some where around $15, you pay a time premium of $0.55 per month. So, you decide to buy 20 contracts of year 2000 , $190 leap, and the total cost is $30K, so where the money come from ? "BORROW" against your held shares of 10000s which worth 1.5 MM in your account. With 8% rate, with 30k borrowed, you interest payment for two years is about $6k, so your total cost for these 20 contract is about $36k , which will disappear completely once the leap is expired in Jan of year 2000, and your cost per share is actually $18, or $0.75 per month for 24 months. Say by Jan 2000, the stock price settled at $600. the net worth per share of your leap is ($600 - $190) = $410. So, at the expiration date, you sell half of your leap holdings , you cash out $ 410 * 1000=410K . After 28% of tax, you leave with $290K dollar of cash. To exercise the other 10 contracts , which is 1000 shares , together with your cost of 36K , you need a total of $190(your strick price) * 1000 + 36000 = $226k So, after exercise the other 10 contracts and return the 30K you borrowed plus $6K of interest , you end up with ( $290K - 226K) = $64K cash together with 1000 stock holdings in your account. So, by year 2000, you increase 10% holdings in your account plus $64k of cash ( which is tax adjusted) . You can use the cash, which is $64k to buy year 2002 leaps to increase more holdings and generate more cash in your account by Jan of year 2002. This is the strategy. But all in all, you need to choose a stock with high growth , and most likely will double every year, if not , then 70% appreciation at least , but you won't generate any cash but just increase holdings. Based on past history and future prospect , MSFT, LU, CSO, AOL are the best candidates to play such games. The worst case is you lose all the $36k, but so what with an account holding 10000 shares with a total worth of $1.5MM ? So, you can only play this game when you have large stock holdings, because the unit of each contract is 100 shares , you can not buy less than that.