LEAP Options

A LEAP might just be the thing you're looking for. It's a normal option on Viagra-it lasts a lot longer. Most people think of options as a speculative tool to be used for short term, repetitive trading. But options are much more. Most don't think of options as a long term investing strategy. But a LEAP (Long-term Equity Anticipation) takes the flexibility of options into the realm of longer investing and not just short term trading,

A LEAP is an option to exercise the rights of the underlying stock within a certain period- if in-the-money. For a LEAP option, the expiration period can be from one to as much as two and a half years. This gives an investor or trader a method to allow more time for a stock to perform as expected but without having to pay the full stock price of owning the stock. For example, to own 100 shares of a stock priced at $50 would cost $5,000. To own a two year LEAP option contract on the same stock could cost about $1,000; thus, freeing up more investment capital for other uses yet keeping a position in the underlying stock. No matter what the cost of a LEAP option, it will be significantly cheaper than owning the stock outright. Not only that, you can roll a LEAP option forward for an even longer period.

An important consideration when buying LEAP options is the breakeven price. To figure this important price, you need to add the LEAP option premium plus any other transaction costs to the strike price. For instance, if the LEAP option cost $3 per share (a contract is for 100 shares) the stock price would have to rise to the strike price plus the $3. If the strike price were $40, then the break-even price would be $43.

As with all options, the total risk is the premium paid. If you own the underlying stock, the risk can be the total amount of stock owned. For example, if the stock costs $50 and you have 100 shares, your risk exposure is $5,000. If the option premium for the same stock is $2 per share, your total risk is the $200 premium paid.

Returns on LEAPS are much higher than owning the underlying stock.

For example, if 100 shares of a $50 stock appreciate to $60, you will have a gain of $1000 on your investment of $5,000 for a return on investment of 20%. If you had one option contract and it went from the initial premium of $2 to $4 you would have a gain of $200 for the contract. This is a return of 100% on the original premium investment of $2.

Options also can be sold (closed out) if they don't behave as desired. It's always advisable to use a mental stop-loss just as in all other trades.

The key benefits of investing in LEAPS over buying the underlying stock is that the risk are lower, the cost of the investment is much less and the return on investment is much larger.