What are Leaps?
Let's do our homework and find a great stock. Here is one trading at $65 we believe after a year it will be worth more or stays in an up-trend. We buy the Stock now with the expiration a year out which is trading at $94.
What if instead of buying the Stock for $65 what if we do a Leap (or buy the right to buy the Stock in two years at a set price today). If we buy the $65 Strike Price, our investment would be $18. After a year the Leap is worth $32 for a 100% return on our investment! Wow, What a great idea! So think about this if we could find great stocks every year we could potentially double our money every year using this technique. What if you can't find great stocks that will make 44% returns in a year? That's okay this technique can help you turn any annual win into a big deal. You can also use leaps to pull out monthly income by using a strategy called a diagonal spread Advantages and Disadvantages over Stock Options The major advantage over buying a leap over a stock option is that leaps give the stock more time to make a move. If the option expires in 3 months you do not have much time to wait around. But if the option doesn’t expire for 2 years the stock has a lot more time to make that move. The disadvantage is that it costs more to buy a leap then it does to buy an option. So, you will not see as big of a return when you are right. In other words you give up some leverage to get some more safety. |
