3 LEAPs I’m Looking to Buy That Offer Explosive Gains

3 LEAPs I’m Looking to Buy That Offer Explosive Gains

Posted On March 31, 2021 3:58 pm

LEAPs are the acronym for Long-term Equity Anticipation Securities, a fancy way of describing an option with a year-plus until its expiration date. 

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That given, I’d be stating the obvious by saying LEAPs are a great way to take a longer-term position. The reason I’m hammering this message home is because I’m currently building a LEAPs shopping list. Specifically, I want to purchase three that I already have in my “check-out” basket. 

LEAPs offer an attractive alternative to buying the underlying stock because they’re vastly more capital-efficient.  Put another way, they provide the type of sensible leverage that we discussed on Tuesday — creating an asymmetric risk/reward with odds tilted toward the latter. 

Just to give you an idea of the capital-efficient nature of LEAPs, let’s compare buying 100 shares of Apple (AAPL) to buying a call option with a 70 delta that expires in June 2022.  With APPL trading at $125, the purchase of 100 shares, assuming no margin because we don’t want to risk losing more than our initial investment, would cost $12,500.  The call option would cost $2,000 — 16% of the cost of the underlying shares. The reason I’d choose an option with a 0.70 delta is that it’ll start moving nearly 1:1 with the stock after a mere 5% increase in shares. 

For, example, if shares of AAPL gain 20% by the end of 2021, that would put the stock at $150 per share, making your 100 shares worth $15,000, a 20% gain. By comparison, the June 100 strike call option would be around $6,000 per contract, a 200% original cost gain. That’s 10x the return on 16% of the cost! 

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Now that we see how attractive the math is, let’s look for some attractive candidates.  I scanned some of the high-growth tech stocks that have enjoyed a good run, up 50% minimum from the March 2020 lows. However, they’re now at least 10% below their 52-week highs.  I originally came up with over 85 names but winnowed it down to the 15 below, which are a mix of solid ‘blue chips’ such as AAPL and Amazon (AMZN) to the more speculative and of questionable valuations such as Tesla (TSLA) and Virgin Galactic (SPCE). 

leaps stocks

Three names from this basket that I’m placing in the ‘check out’ bin for immediate purchase of 1 contract a 70 delta June 2022 LEAPs are Paypal (PYPL), Shopify (SHOP), and Zoom (ZM). 

The strikes and cost are; PYPL 220 strike at $40 per contract, SHOP 960 strike for $240 per contract, and ZM 300 strike for $45 per contract.  All told, this will cost about 15% of what buying 100 shares of each would. My risk is limited to the cost and there’s an unlimited upside.  But, to be realistic and maintain a proper risk/reward discipline, I’ll be setting both price targets and stop-loss limits in the next few days. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.