Most people, including non-investors, know that the primary way to make money in the stock market is to buy a stock and sell it later at a higher price.
Simple enough, right?
Well, what if I told you that there’s a way to safely invest in a company at a 70% discount or more to its share price?
Better still, this lesser-known strategy can increase your return on investment significantly over simply owning stock.
Go Long Using LEAPS
As you know, options are derivative instruments of stocks. Options allow investors to buy or sell units of stock on a certain date (expiration) at a certain price (strike price).
Options usually have expiration periods of three, six, or nine months. These time frames are well-suited for speculators trading short-term trends.
But there’s another way to trade options: Long Term Equity AnticiPation Securities, or LEAPS.
LEAPS are options with expiration dates longer than one year. Some LEAPS even have two-year expirations, which are perfect for what I like to call “stock substitutions.”
By purchasing LEAPS to get long a company versus buying stock, you have several distinct advantages. Let me explain.
Spend Less and Earn More
As you know, an option is a contract to buy or sell 100 shares of stock. Let’s say shares of ABC Company trade for $100, and a $105 call option that expires two years from now costs $1 per share.
With just one contract, you can control 100 shares for the same cost as buying a single share ($1 per share * 100 shares) at $100. That’s a 90% discount to owning shares! Purchasing 100 shares of ABC would run you $10,000 before commissions.
And because options often move faster than stocks, your gains will be much greater than the underlying shares over the same time frame. A $1 increase in the ABC calls’ value would double your investment, versus a $1 move in shares, which would net you just 1% in profit.
Now, LEAPS are more expensive than short-term options. You’re essentially paying a premium for the extra time that underlying shares have to reach the strike price. But considering you’re already saving big money over buying shares outright, the tradeoff is well worth the extra cost.
Best off all, your total downside is limited to your net debit, or the cost you paid for the options. In other words, if you purchased 10 contracts of the ABC calls, your downside is limited to $1,000.
Remember, your max downside on a 100-share ABC stock purchase is much higher at $10,000.
Why Use LEAPS Now?
The market’s fear gauge, the VIX, has just dropped below the high-volatility threshold of 20 for the first time in six weeks. As you’ll recall, option prices fall as volatility drops.
That means now is the time to go long with LEAPS.
Once you’ve tried this strategy on for size, I won’t be surprised if you never want to buy a single share of stock again.
On the hunt,