Buying Equity LEAPS Calls To Anticipate A Rally
An investor anticipates an advance in the stock of one of the LEAPS issues over the next two years.
Possible Market Action:
||Buy Equity LEAPS® Calls
An investor anticipates an advance in the price of a stock underlying a LEAPS
issue over the next two years. He would like to profit
from a rise in the stock without having to purchase the shares.
ZYX is currently trading at 50.50 and a 2 year LEAPS
call with a 50 strike price is trading for 8.50. The investor
purchases five of these for $4,250. These five calls give him
the right to buy 500 shares of ZYX between now and expiration
at 50 no matter how high the stock should rise. The break-even level
in this example is 58.50 (strike price + premium paid)
If ZYX advances to 65 by this date, the individual has the choice
of exercising the five calls and taking delivery of the stock
by paying $50 per share or selling the LEAPS for a profit.
At expiration, the LEAPS will be trading for at least 15
with ZYX at 65.
Buy Five LEAPS ZYX 50 Calls
Closing Sale Price (5 x 100 x 15):
|Less premium paid (5 x 100 x 8.50):
|Profit in this situation:
The risk is only the total cost of the calls, $4,250 plus commissions
if ZYX does not rise above 50 by the expiration date.
The LEAPS may trade somewhat higher than the difference
between the 50 strike price and actual stock price due to the
possibility that the stock price may increase over the time remaining
to expiration. This is known as time value and the amount of time
value contained in an options premium will decrease as expiration
Commissions, dividends, margins, taxes and other transaction charges have not been included. However, they will affect the outcome of option transactions and should be considered. The strategy discussed above is for illustrative and educational purposes only and should not be construed as an endorsement, recommendation or solicitation to buy or sell any particular security.