While 2020 will forever be remembered for the coronavirus and the impact it had on the economy and our collective psyche. In the stock market, this year will also be remembered for cutting-edge companies potentially changing our world and rising to prominence, and the slow death of many companies/stocks that had been leaders for decades. And a great way to get bullish exposure to both new and old stocks is through longer dated options called LEAPS.
Calls/puts that are more than a year from their expiration date are referred to as LEAPS (Long-Term Equity Anticipation Securities). LEAP options are most commonly used in two situations:
- Young stocks that could be boom or bust in the future
- Stocks that have been hit hard, but the trader/buyer is looking for a longer-term turnaround
That isn’t to say that LEAPS don’t work in “normal” stocks, such as Apple (AAPL) or Microsoft (MSFT). But longer-term turnaround stocks are very popular with LEAPS. Which brings me to Virgin Galactic (SPCE).
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LEAP Options in Virgin Galactic (SPCE)
SPCE rose dramatically two weeks ago following an aggressive stock initiation from Bank of America, with the headliner of the research note theorizing that the stock could double. Here is some of that analysis:
“While Virgin Galactic is not yet operational, the company is gearing up to begin serving customers in early 2021. We believe SPCE’s growth potential is unparalleled vs. our coverage and the current nascent stages of the company provide investors with a unique entry point into the stock.”
There is a lot to unpack in that upgrade.
On the one hand, Bank of America thinks the stock could double.
On the other hand, “Virgin Galactic is not yet operational.”
This uncertainty, but with the potential for big stock gains, is almost a perfect situation for call options if we wanted to get involved. Why? Calls give us unlimited upside potential, but with limited risk. And LEAPS give us exposure to a stock on a longer time frame.
With this in mind, if I wanted to execute a LEAP call buy in SPCE I might target the January 25 Calls (expiring 1/21/2022) for $8.
This call buy would give me bullish exposure to SPCE for well over a year, and the most I could possibly lose on this trade is the premium paid, or $800 per call purchased if the stock were to close below 25.
This $800 risked in the LEAP buy is a dramatic discount in comparison to buying 100 shares at 22 per share, or a capital outlay of $2,200.
LEAP Options in Nikola (NKLA)
Similarly, we could execute a LEAP call buy in Nikola (NKLA), which has been called a cutting-edge technology company—and a complete fraud. And while I won’t get into the weeds as to which of these claims is true, if I wanted to play a positive stock outcome, I might execute this trade:
Buy to Open the NKLA January 25 call (expiring 1/21/2022) for $13
Much like the SPCE trade, the most I could possibly lose on this trade is the premium paid, or $1,300 per call purchased if NKLA were to close below 25 in January of 2022.
LEAP Options in Exxon Mobil (XOM)
Switching gears from hot technology stocks to potential turnaround plays, if I wanted to execute a bullish trade in Exxon Mobil (XOM), which has been a total stock disaster the last several years, I might look to execute this LEAP call buy targeting a move higher by 2023:
Buy to Open the XOM January 35 call (expiring 1/20/23) for $6
This LEAP buy would give me two years of bullish exposure to a potential turnaround in XOM stock, with the most we can possibly lose being the premium paid, or $600 per call purchased.
SPCE, NKLA and XOM couldn’t be more different in terms of the stage at which they are in their company’s history, or investors’ perception of them. How they will perform over the next year or two is truly anyone’s guess. However, with the awesome power of LEAP options we can get bullish exposure to each, at a fraction of the cost of buying the stock outright.
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More