How to Buy or Sell the Correct LEAPS Options
Why should I use LEAPS?
I often get asked this one question.
Now, before I get to the answer, let’s go through what Long-Term Equity Anticipation Securities (LEAPS) are and why you should use them.
LEAPS are options that can expire in a year, two years or three years.
War Room members have had huge success using LEAPS, and profits of triple digits are not unusual. We have even recorded a quadruple-digit gain using a LEAPS spread on AbbVie (NYSE: ABBV).
I advocate using LEAPS exclusively on stocks that have them available.
Well… why risk 100% of your money for the next year or two when you can risk a fraction of that for potentially larger returns?
With LEAPS options, you can mimic the movement in stock prices and hold those positions as long as you would hold the shares. Now, we’re not talking about a 10-year hold here. Most people hold on to positions for days or weeks nowadays, so a year or two is REALLY a long-term hold!
Here’s what I do…
- I choose the stock.
- I check to see if it has LEAPS options.
- I decide how much I want to spend based on the underlying share price, my stop loss if I bought the shares and whether it’s a one- or two-year option.
I use a 25% stop loss on most of my positions and will do so for the following example as well. Let’s see how this would work. Note: This is not a recommendation.
Assume I want to buy AbbVie…
The shares are trading at $111, and I think the shares will go to $170 by January 2023 (again, this is an example). To buy 1,000, shares would cost me $111,000.
I don’t have that kind of cash lying around! If I did buy the shares, my stop loss would be $83.25, and on 1,000 shares I would lose $27,750 if that stop loss were triggered.
That’s A LOT OF DOUGH!
Now let’s take a look at the two-year LEAPS option on AbbVie with a $110 strike price. It would cost me around $12 for that option. That means I would spend $12,000 for 10 contracts to control 1,000 shares for almost two years! That’s only 10.8% of the current share price instead of 100% if I bought the shares.
The most I could lose is $12,000, whereas $27,750 is my stop loss on the shares. And instead of having to spend $111,000 that I don’t have, I can spend the $12,000 that I do have.
My breakeven is $122 per share on AbbVie ($110 strike plus the $12 cost of the LEAPS).
Anything above $122 is gravy, and if I think the shares are going to $170… that’s a lot of gravy!
Action Plan: If you liked this example, then join me now in The War Room to get these types of trades in real time. Your next LEAPS option is awaiting you – click here to get it!