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I’m often asked, “Matt, are Long-Term Equity Anticipation Securities really that complicated to understand?”
First, don't call them that. All the cool kids just call them “LEAPS.” And if you do too, you’ll get invited to more parties. Maybe even fancy ones.
Second, LEAPS are extremely simple to incorporate into your portfolio. And they can be one of the greatest tools in your arsenal.
But Wall Street purposefully fills the discussion around LEAPS with jargon and dense descriptions to make them seem needlessly complicated and feel out of reach to the little guy.
Professional traders use LEAPS. Most retail investors don’t… though they should.
So today, I’m going to show you how easy LEAPS are to use. And why now is the perfect time for you to consider using them.
Alphabet Soup to Sensible
Sometimes a creator falls in love with an acronym. (Believe me, I know… cough, cough… VIPER System…)
The acronym fits perfectly for marketing, or it just sounds super sweet and would look good on a logo. Unfortunately, you’re then forced to string together a series of words to have that acronym make sense.
S.H.I.E.L.D from the Marvel comics universe is a perfect example. The iconic Stan Lee and Jack Kirby wanted a government organization named S.H.I.E.L.D. because, let’s be honest, it sounds cool.
To make this work, S.H.I.E.L.D. originally stood for: Supreme Headquarters, International Espionage and Law Enforcement Division. Which is clunky.
It was then changed to: Strategic Hazard Intervention Espionage Logistics Directorate. And that’s just alphabet soup.
So, it was tweaked once again to stand for: Strategic Homeland Intervention Enforcement and Logistics Division. Better. But still just feels like words strung together to make S.H.I.E.L.D. mean something.
With that in mind, you must understand LEAPS is a registered trademark of the Chicago Board Options Exchange (CBOE).
It’s a marketing term.
And the acronym LEAPS is derived from:
Antici … (take a breath)
Let’s admit, that’s a stretch. They just really wanted to make that LEAPS acronym work. And what they decided on sounds important and complicated.
So, what are LEAPS?
Well, prepare for a big letdown …
They’re just long-dated options.
You see, traditional options have expiration dates that are three months, six months, and nine months out. And there are some shorter-term ones, like dailies and weeklies. But traditional options have a maximum expiration date limit of nine months.
Well, the only difference between traditional options and LEAPS is that LEAPS are simply options with expiration dates more than a year to three years out.
LEAPS have been in front of you this whole time. But Wall Street made you believe you needed a special account or skill to access them. You didn't. If you can trade options, you can trade LEAPS.
Pull up an options chain – call, puts, spreads, your choice – on the SPDR S&P 500 ETF (SPY). You’ll see all these options expiring September 20, 2024 through December 19, 2025. Those are LEAPS. Click on them. You can buy and sell them just as you would any other option.
Now you may be asking, “Well, if that’s it… then why is now a perfect time for LEAPS?”
And I have a one-word answer to that question (after all those words I just wrote and these):
More than Morris Day and The Bird
LEAPS were created to capitalize on the most powerful force in the markets: Time!
History has shown over and over again that the longer an investor is in the markets, the higher the probability of walking away with a gain.
At the same time, LEAPS are less capital intensive than buying shares and offer investors the potential explosive returns that can be achieved with options. Plus, if you hold them more than a year, no U.S. short-term capital gains tax.
This combination is why LEAPS are favored by professional traders (and why they don’t want you mucking about with them).
It’s the best of both worlds.
With LEAPS, you don’t need to be a “sniper.” You don’t need to chew your nails over intraday or day-to-day moves of an index or a company. You don’t need to know where the market or a stock is going to be tomorrow, next week, or next month.
You have time on your side. At the very least a year.
This is how you leverage the power of LEAPS to your advantage.
Let’s consider today …
There’s probably a part of you that feels really nervous as your portfolio has bled red over the last couple of weeks.
But forget about today. Forget about next week or next month.
Take a breath…
Where do you think the market is going to be a year from now? Two years from now?
Same thing goes for your favorite large-cap stocks.
Let’s say I’m bullish. And I think the market is going to be higher one year from now.
I could buy 100 shares of the SPDR S&P 500 ETF for $43,815 ($438.15 x 100). I could even snatch up 100 shares of the Invesco QQQ Trust (QQQ) – a proxy for the Nasdaq 100 – for $36,338.
That’s a lot of money at risk. And my upside is limited to however much the share prices move higher.
Or I could tap into the power and leverage of LEAPS.
For example, one contract of the SPY September 20, 2024 $440 calls – which gives me control of 100 shares – would cost me roughly $4,100.
And one contract of the QQQ September 20, 2024 $365 calls would set me back roughly $4,214.
That’s a lot less cheddar on the line.
Plus, if the markets rally over the next six months to a year – which I expect them to do – I’ll be in even better shape.
Of course, there’s no obligation for me to hold these LEAPS until September 2024. I can sell them for a gain any time I want.
Maybe the market is choppy for another few sessions. So what … time is on my side.
That’s the benefit of LEAPS.
Don’t fear them. They’re not that complicated.
Learn to make them a part of your portfolio, and you’ll be doing “The Bird.”
C.H.E.E.R.S. (Calculating Historical Exponential Equity ReturnS),
This article originally ran on Tipping Point Profits.
P.S. My colleague Chris Johnson is going to show investors how they can get their hands on shares of some of 2023’s best performers for as much as 90% off their “sticker price.” This is a live event tomorrow morning at 10 AM ET on Money Morning LIVE. Click here to set a reminder...