Understanding LEAPS
Another type of option vehicle is called LEAPS. LEAPS stands for Long-Term Equity AnticiPation Series. Think of them as your vehicle to, in effect, "leap" over time into the future. They share the same disadvantages of other options: A wasting asset and a limited time frame.
But they also provide all of the key advantages: absolute limitation on loss, listed on regulated exchanges and great profit potential.
Plus, they provide two more advantages: They are much longer term, and far less volatile than other options. These extra advantages can make the LEAPS somewhat more expensive. But I think that extra investment is well worth it.
Bottom line: With LEAPS, you have the potential to control large blocks of stock with a relatively small investment. And with LEAPS put options, you have the potential to make windfall profits from the bear market that I am convinced will be the dominant trend in the months and years ahead.
Best of all, with LEAPS that expire one or two years from now, you have plenty of time for this scenario to play itself out. You don't have to track it daily. And I repeat: Even in the worst-case scenario, the most you can lose is the amount you invest - never a penny more.
A Side Benefit: Crash Insurance
LEAPS also offer an excellent vehicle to protect your other assets from a decline. For example, you may have a pension fund or 401(k) that is out of your reach and, at the same time, tied up in the stock market. Or you may have inherited stock that's been in the family for generations and would trigger a substantial tax bite from Uncle Sam if you sell. These LEAPS provide a relatively inexpensive mechanism to hedge your portfolio.
As the market declines, LEAPS put options should rise in value, helping to offset some or all of the losses in that portion of your stock portfolio that you cannot liquidate.
They are not expensive and they are long term. So you can tuck them away in your portfolio and forget about them. If they work out, fine. If they don't, you write them off just as you would write off the premiums in an insurance policy.
LEAPS are far less volatile than most short-term options. So they can be comfortably tracked in a monthly newsletter. Plus, the combination of the two in one portfolio is bound to be even less volatile. However, they do have to be followed, and mid-course adjustments will be needed along the way. You cannot just put them into your portfolio, throw away the key and forget about them for three years.
|
