I love trading long-term equity anticipation securities (LEAPS)…
LEAPS are long-term options that have at least one year left before expiration. Since they are more expensive than short-term options (because of the extra time value), many people avoid them.
However, as a fundamental tactician, my goal is not always short-term gains…
Even though most of my trades, LEAPS included, are held for a very short time period.
Confused?
Let me explain…
Because LEAPS have a lot of time on them, a short-term move in underlying shares is magnified in a LEAPS option.
Think about it…
The options pricing model has several components, and a change in any one of those components can make an option move sharply.
So the pricing model looks at a move in the short term and amplifies that based on the amount of time remaining in a LEAPS option. A 5% move in a stock price might result in a 50% move in a short-term option but a 100% move in a LEAPS option.
That’s just one reason I like LEAPS…
But it’s not the main reason…
LEAPS allow time for a recovery play.
Let’s take a look at one of our recent winners, Freeport-McMoRan (NYSE: FCX). When I first made the recommendation in The War Room, it was on the back of strong insider buying and a pure China play.
I recommended a position in the Freeport-McMoRan LEAPS that expired in January 2021, more than 16 months from the original recommendation date.
The trade went the wrong way almost immediately as the Chinese and U.S. delegations broke off trade talks.
War Room members’ LEAPS took a hit, falling almost 40% over a period of a few months. If you owned short-term options, you were toast…
But not us…
Even down 40%, we still had the luxury of time on our side, and the Freeport-McMoRan shares had fallen from $11 to $9 – which is not a massive drop for such a volatile stock.
I was so confident in the play, I recommended doubling down.
Then, in late October and early November, the tone of the negotiations turned positive and Freeport-McMoRan reported good earnings. That was enough for the shares to take off from that $9 level to over $11.
Action Plan: The lesson learned here is that with LEAPS options, you have time on your side and can withstand a bad quarter or two and still be in the game!
[adzerk-get-ad zone="245143" size="4"]About Karim Rahemtulla
Karim began his trading career early… very early. While attending boarding school in England, he recognized the value of the homemade snacks his mom sent him every semester and sold them for a profit to his fellow classmates, who were trying to avoid the horrendous British food they were served.
He then graduated to stocks and options, becoming one of the youngest chief financial officers of a brokerage and trading firm that cleared through Bear Stearns in the late 1980s. There, he learned trading skills from veterans of the business. They had already made their mistakes, and he recognized the value of the strategies they were using late in their careers.
As co-founder and chief options strategist for the groundbreaking publication Wall Street Daily, Karim turned to long-term equity anticipation securities (LEAPS) and put-selling strategies to help members capture gains. After that, he honed his strategies for readers of Automatic Trading Millionaire, where he didn’t record a single realized loss on 37 recommendations over an 18-month period.
While even he admits that record is not the norm, it showcases the effectiveness of a sound trading strategy.
His focus is on “smart” trading. Using volatility and proprietary probability modeling as his guideposts, he makes investments where risk and reward are defined ahead of time.
Today, Karim is all about lowering risk while enhancing returns using strategies such as LEAPS trading, spread trading, put selling and, of course, small cap investing. His background as the head of The Supper Club gives him unique insight into low-market-cap companies, and he brings that experience into the daily chats of The War Room.
Karim has more than 30 years of experience in options trading and international markets, and he is the author of the bestselling book Where in the World Should I Invest?
