Dear Reader,
Chris Johnson, Money Morning’s Chief Investment Strategist, here.
After 2023’s breakout year in the stock market, every stockpicker on the planet is jumping for joy.
But we already know the hidden truth – that since 2020, cumulative inflation is up 21%. So, we have to experience record year after record year to just keep up with how quickly the price of goods and services have increased.
Stocks alone – to put it bluntly – are just no longer enough.
Famous traders and investors through history already recognized this. People like The Big Short's Michael Burry, Black Swan's Nassim Taleb, Paul Tudor Jones, and even Paul Pelosi.
That’s why I’m personally harnessing this investment vehicle that uses stocks to push their prices higher. I’m talking about potentially collecting $40, $50, $60, and sometimes even more than that every time a stock moves.
And I’m so happy you’re here with me.
Let’s say Amazon (AMZN) hits a home run with a new business venture. They build a self-driving car before Tesla (TSLA) or Ford (F). The stock is up a few percentage points, a few dollars.
Would you scream “hooray” from the rooftops after making $5? Sure, you can now buy the pack of gum you couldn’t have before. But that’s only a fraction of the potential here.
Because by adding what I call a Synthetic Stock Position, you’re able to spend less than what you would on Amazon stock and amplify your gains much more than any stock position.
And Long-Term Equity Anticipated Securities – LEAPS – are exactly how you can do that.
What Are LEAPS? (And How to Start Using Them)
I’m a long-term investor with the goal of letting the long-term trends build my wealth, so I’m looking to hold a stock or control it for a lot of time. Maybe you’re in a similar position.
LEAPS allow us to do exactly that, control 100 shares of a stock for an extended period of time (at a fraction of what it costs to stock investors).
What I'm mainly talking about are stock options. You can hold these daily, weekly, monthly, or even longer than that. Paul Pelosi, Paul Tudor Jones, Nassim Taleb, and Michael Burry all harnessed the power of options to amass fortunes - as you've already heard.
LEAPS are just options that typically have a longer holding period. But they're options all the same.
They will seem complicated at first – but I promise they aren’t. What’ll be most helpful is if we talk through stocks and examples of these Synthetic Stock Positions once we get through the “explainer.”
For the four examples we’ll run through today, I’m using the January 17, 2026, expiration calls. Stick with me – I know that’s word soup.
This “expiration date” provides more than 18 months for the long-term trends to move each stock I “synthesize” higher.
So, what does “expiration date” mean?
At its core, an option is a remarkably simple security.
Just as we said before, an option is nothing more than a contract to buy or sell 100 shares of the underlying stock at a specified price before or on a certain date, called the “expiration date.”
Once an option reaches its expiration date, it either gets exercised or expires worthless.
LEAPS trade daily, so you can sell an option anytime between the purchase date and its expiration to either take profits or control losses. Remember that down payment to lock in a future home price I was just saying? That’s essentially what you’re trading when trading with options.
All LEAPS expire in January of each year, so it is easy to determine which expiration I want to use, simply look at the calendar and choose how long I want to control the stock.
Once I have determined the length of time for the LEAPS, I next choose the strike price of the LEAPS option I am going to purchase.
The “strike price” refers to the price you want to lock in the stock for.
My approach to choosing a strike is simple. I typically select a strike that is 10-15% “out-of-the-money” - or higher than the current price of the stock.
When a call option goes in-the-money, it means the market price of the underlying asset is higher than the strike price.
When a LEAP goes in-the-money I have the right to buy the stock at a price lower than its current market price.
If I choose to exercise the option, I can buy the stock at the strike price and either hold it or sell it at the market price, making a profit.
Choosing an option that is out-of-the-money reduces the cost of the LEAPS option I purchase. This makes the LEAP more affordable and provides my position with more leverage.
Okay, I get it… that was a lot and a lot of it may not make sense right now.
But it will in a minute. Let’s put it all into context with one of the biggest – and most expensive – trends in the stock market today…
The “AI Revolution”
There is no denying that artificial intelligence (AI) is the biggest story in the financial markets.
And the hype is real: PricewaterhouseCoopers projects that the AI industry will be worth a staggering $15.7 trillion by 2030 - less than six years from now.
Market experts are predicting that this will be the fastest creation of wealth in history - and that’s already proving true…
If you’re not already invested in the top AI companies in the world, you might feeling like you’ve been priced out of the market…
In 2023, just seven AI stocks have added a staggering $3.02 trillion in combined market cap. To put that into perspective, the gross domestic products (GDPs) of France and the United Kingdom are $2.8 and $3.1 trillion, respectively.
This small handful of stocks single-handedly dragged the market back into bull territory through more than a year of inflation and economic pressures.
Despite their obvious power, many investors are hesitant to pay $200, $300, even $400 or more a share for a stock - because it means they can’t build a substantial position while properly diversifying market single-stock risk.
Thanks to the extraordinary runup we’ve already seen since OpenAI’s ChatGPT threw the floodgates open for AI investing, the best AI stocks in the market are already eye-popping expensive - and building a small portfolio of stock positions in leading tech companies like Nvidia, Microsoft, or Google can cost upwards of $350,000 or more. 
Look at the table to the right. It would take $385,000 to buy just 100 shares of the eight AI stocks that investors crave the most in their portfolio.
Heck, it would take almost $4,000 just to buy one single share of each of these stocks.
While these stocks may seem expensive, they’re still incredibly early in the game in terms of fully monetizing the AI revolution. These stocks are still only getting started in monetizing the AI Revolution.
What I’m saying is that the upside potential for these and other AI stocks is still another 100%, 200%, 300%, or higher between now and 2030.
If you believe that, then buying shares in the AI leadership stocks is still an incredibly smart long-term move for investors.
Because over the next few years, these companies are likely to double or even triple in value or more AGAIN.
Don’t believe me?
Look at how these AI stocks have performed just this year as AI has gone mainstream…
NVDA - up 495% since July 2022
MSFT - up 70% since July 2022
SMCI - up 2800% since July 2022
And with AI hype driving the entire market back into bull territory in 2023 and 2024, these stocks are going to continue to power higher over the coming weeks, months, and years.
But most investors feel locked out of this incredible opportunity because they can’t afford to pony up tens of thousands of dollars to build positions in the companies that are powering going to power the artificial intelligence revolution.
I mean seriously, the average investor over the age of 60 only has a little over $200,000 in their brokerage account. How are you supposed to put a strong, diversified portfolio ready to profit from this movement?
Because of that, many will miss out entirely - on what is likely to be the biggest profit opportunity of our lifetime.
But there’s a way to take a long-term stake in companies like NVDA WITHOUT paying $45,000…
You can do it WITHOUT buying a single share
How? Synthetic Stock Positions.
A Synthetic Stock Position Using Nvidia
Let’s look at an example using Nvidia (NVDA)…
Here is the recent stock chart for the company.
Shares hit a high of $975 in March and have pulled back from those highs by more than 10%. With the stock trading at $900, in a bullish trend, it appears that the highs of $975 are well within reach… and then some.
Using our 10-15% out-of-the-money guideline, I automatically consider purchasing the $990 or $1,000 strike price call LEAPS. I’ve already determined that the expiration date I am using will be the January 17, 2026 expiration calls.
Now, the strike price may seem high at $1,000, but let’s remember that the stocks I am focusing on for this strategy have made 10,% 20%, and even 40% moves higher in a matter of weeks or months.
That, combined with the fact that I am investing in the long-term trends of these stocks – some having returned more than 100-200% in a year – makes a 10% out of the money LEAPS option appear well in range for capturing the long-term trend.
Here’s the comparison of the purchase of 100 shares of NVDA versus a single January 16, 2026, NVDA $1,000 Call.
Notice right out of the gate, the difference in cost between these two transactions. The LEAP that I am investing in – note that I said investing in, not trading – is only 28% of the cost of purchasing 100 shares of the stock.
Despite its 28% lower cost, I still have control over 100 shares.
Let’s look down the road and see what this trade might look like if the stock moves higher by the end of 2024.
Say shares of NVDA are trading at $1,200 on December 31, 2024. For what it’s worth, I come to that assumption by factoring a 35% rally from the current price.
That isn’t an outlandish assumption since shares have already traded 80% higher in the first quarter of the year and are more than 230% higher over the last year.
Here is how the stock and the synthetic stock positions would look.
As you can see, the nature of the LEAPS to synthesize the stock’s movements playing out to provide a similar return to shares of Nvidia stock.
One inherent benefit of the LEAPS option over a straight purchase of the stock is something we call “convexity.”
“Convexity” is the non-linear growth that occurs when a call option continues to move further and further in-the-money, or above its strike price.
Look at the difference in returns between the stock and the LEAPS option if shares of NVDA close 2024 at $1,500 instead of $1,300, a return of roughly 50% from current prices.
Let’s take that projection one step further.
Assume that Nvidia continues to perform at 50% a year through 2025.
The positive convexity that the LEAPS option provides adds leverage that has the LEAPS performing more than double the return of just holding the stock.
The additional return from the LEAPS option displays one of the major benefits of investing in the long-term trend of a stock that continues.
Here is the obvious negative…
Any stock is going to have periods in which it trades lower.
This will affect the value of the option as much or more than the value of the stock position depending on how deep in, or out of the money the option is trading.
How do you overcome that? Trade this as you would a long-term stock position by either:
- Dollar-cost averaging in the LEAPS position by buying another call
- Close the position at a price level that is consistent with how you would be managing the stock position.
In these cases, I ALWAYS use the stock’s price as the indication that it is time to close the option position, never the option price.
This is a long-term investment, and you should plan to manage it that way…
The flexibility of using LEAPS allows me the same target profit, stop-loss, and income generating potential as buying 100 shares of any stock, all while committing up to 75% less capital to each position in my portfolio.
It’s truly one of the most effective ways to diversify any portfolio, whether it’s worth $50,000 of $5,000,000!
How to Start Building a $110,000 Synthetic Stock Portfolio With Three Key AI Stocks
Here is where we get down to – as they say - the nitty gritty.
I’ll suggest the first three trades of an AI portfolio using three different types of companies. For what it is worth, these are three positions that I am participating in myself.
My goal is simple, to diversify my portfolio by including several AI companies using LEAPS.
A secondary goal is to leverage the potential returns of these companies, thereby beating the average returns of an average AI-themed portfolio.
Synthetic Stock Position No. 1: Super Micro Computer (SMCI)
I’m starting the portfolio with the newest AI headliner on the block, Super Micro Computer (SMCI)
Since storming on to the scene in 2023, Super Micro has caught up with the previous AI leader, Nvidia. Over the last year, shares of SMCI have traded higher by more than 200%, the majority of that over the last six months.
The reason for the recent “supercharging” of the stock is the fact that the stock is still in what I refer to as the “Discovery Stage.”
Names like Microsoft (MSFT), Amazon (AMZN), and Nvidia (NVDA) have been known leaders in the alternative intelligence industry for years.
Super Micro has charged on to the scene as one of the largest producers of high performance and efficiency servers in the world. Their role in the industry is growing quickly as AI’s applications make their way into the market, multiplying demand for processing power.
I always think of Super Micro in this way… Where Nvidia is the “brain” of AI, Super Micro is the “body.”
To the “Discovery Stage.”
This refers to the low exposure that Wall Street and retail investors like you and I have had to the stock.
Currently, there are only 17 Wall Street financial analysts covering Super Micro with a recommendation or price target. Compare that to 50 for Nvidia, 57 for Microsoft, or 61 for Amazon.
The lack of analyst coverage suggests that the stock remains uncrowded. That, along with the continued growth potential from AI, puts Super Micro in a high growth category that I feel is worthy of a position in my LEAPS portfolio.
The $1,000 strike is slightly higher than 10% out-of-the-money from SMCI’s current price.
This LEAP option is priced at $315 per contract. Since the options controls 100 shares, the total price for the position is $315.00 * 100, or $31,500.
It seems like a lot at first, but remember that you are controlling $90,000 worth of SMCI stock with this LEAP position.
We’ll follow up on this position in the coming weeks.
Synthetic Stock Position No. 2: Palantir (PLTR)
Palantir (PLTR) is one of my favorite “AI Service” holdings.
At its heart, the company is a data analytics company that specializes in big data analysis.
They offer software platforms designed to assist organizations, including government agencies and commercial enterprises, in analyzing, integrating, and visualizing large and complex datasets.
Their platforms are used for various purposes such as counterterrorism, financial fraud detection, healthcare analytics, and supply chain management.
Like Super Micro, Palantir is just starting to get its due recognition in the AI space as it moves into the next growth phase.
The first phase of AI growth came from the building of its technology. GPUs, storage, and computing power all built the “foundation” for AI, now that foundation will be applied to various service industries.
That’s where the next huge potential for growth lies and Palantir is right smack in the middle of that industry.
Palantir shares spent the initial stages of their life as a MEME stock. Nobody knew what the company really did, they “traded” it based on what was being said in the market. That led to a rough 2022 and 2023 that saw the stock trade as much as 86% lower than its post-IPO 2021 highs.
The stock crossed back into a long-term bull market trend in 2023 and has moved 277% from its lows. The upside potential remains extremely high as we’re now seeing the company’s earnings results and forecast benefit from the advances in AI.
The price of this option is much less than the SMCI position, due to Palantir’s lower share price.
The $25 strike price is a little less than 10% out-of-the-money, which means that the LEAP position has the potential to move in-the-money faster and potentially take advantage of positive convexity.
Prices at $7.10, the LEAP option would cost $710 to add to your portfolio. That $700 also controls 100 shares just like the SMCI option.
Keep in mind that if you are trying to build a balanced portfolio you may want to buy multiple LEAPS of the lower priced stock.
Synthetic Stock Position No. 3: IBM (IBM)
I refer to this company as one of the original AI companies.
Of all the AI stocks I currently monitor, IBM (IBM) finds itself in a more interesting position than most.
Shares of IBM are what I call “underloved.”
The company has obviously been discovered, just not as a true AI investment.
Here’s what I mean. The current analyst recommendations on IBM shares reflect more than a hint of pessimism. Currently, only two analysts favor the stock with a buy recommendation. The remaining analyst cast a hold or sell recommendation on the stock.
Comparing that to the “average” for AI companies like Microsoft, Alphabet and NVIDIA, the stock is vastly underappreciated.
This comes with an advantage, and it’s a powerful one.
Analyst upgrades are a powerful catalyst for stocks. On average a stock will move 5% or more on the simple “upgrade” of a stock from hold to buy.
Add that to the fact that IBM is just getting started at becoming recognized as an AI stock. I love finding stocks like this in any industry.
Going one step further, analysts have underappreciated the stock with their current target prices.
Today’s average target price for IBM is $180, slightly lower than the current price of the stock.
This suggests that analysts will have to begin upgrading their price targets, bringing even more attention to this undiscovered AI gem.
Let’s hit the fundamentals for a minute.
As I have indicated, IBM shares are in the early innings of their foray into Alternative Intelligence. Like General Electric, Intel, Cisco and other early technology leaders, IBM has spent the last decade retooling and realigning.
But IBM is doing exactly what IBM does… leveraging its technology with business partnerships.
The recent announcement of further expansions of the company’s work with Amazon’s AWS reflects how IBM will be monetizing their efforts.
There is an advantage there that most do not think about.
Companies like NVIDIA, AMD and other leading chip manufacturers are already fighting the commoditization of their products. IBM’s focus on leveraging their business partnerships is something that is not replicable and will not face a price war as the technology begins a leveling process. Something that has ALWAYS happened with innovative technology.
Instead, IBM will work to monetize the use of this technology. That is an incredible value as almost everyone struggles to answer the question “how do I make AI work for my company?” The fundamental shift is starting to show in the company’s revenue and earnings trends.
Bottom lining this for you.
IBM shares reflect a rare “value play” in the field of artificial intelligence.
Current fundamentals reflect a long-term improving trend with the stock’s technicals reflecting building strength. Despite those two positives, sentiment remains pessimistic.
This combination is a dream setup for any contrarian investor and suggests that IBM will continue to build strength in the AI space.
Here’s the IBM LEAP I consider for my LEAP Portfolio.
IBM trades at a much lower volatility than both SMCI and PLTR. This means that we’re getting more “leverage” or “buying power” from using the LEAP approach.
The same 10% out-of-the-money strategy on IBM targets a purchase of the January 16, 2026 IBM $200 calls. Thos calls are 9.2% above current prices.
The $200 call has a purchase price of $19.35 which means that the options total cost is $1,935. That only 10% of the total price you would currently pay for 100 shares of IBM.
