Buying Equity LEAPS Calls To Anticipate A Rally

The LEAPS Option Strategy Workshop is a collection of discussion pieces designed to assist individuals in learning how options work and in understanding various LEAPS options strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice.

Investment decisions should not be made based upon worksheet outcomes.

Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet.

Buying Equity LEAPS Calls To Anticipate A Rally

Stock Assumption: Bullish
Situation: 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): $7,500
Less premium paid (5 x 100 x 8.50): $4,250
Profit in this situation: $3,250

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 approaches.

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.