Explaining a LEAPS Play on Freeport-McMoRan
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.
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.
Because the magnitude and speed of the move took members’ options higher, they were able to close the position out for gains between 30% and 100% depending on when they got in!
Here’s what some members had to say:
“In @ .90, Out @ 1.70…. made enough on that one trade to cover my LIFETIME subscription with The War Room!! So awesome!! Thanks Karim!!!” – Michael E.
“FCX in .78 out 1.72, 117%.” – Gary K.
“In @ .78, out @ 1.75. Thx Karim.” – Chris F.
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!
Join me in The War Room as I recommend more LEAPS for profits!