First, some good reading material…
We don’t mean to sound like a broken record today but with Netflix (NFLX, $102.13, up $15.15) hitting $100 we thought we would talk about options that can be used to play stocks that you think are going to make huge moves 6+ months and out. You can use call options if a stocks is at $50 and you think it’s going to $100 or put options if shares are at $100 and you think they are going to $50.
A LEAP is an option that stands for a Long-term Equity Anticipation Security and is essentially an option with a much longer time frame than a traditional stock option. Like options, LEAPs can be purchased as a call or a put, meaning that you have the right to buy or sell shares of a stock at a certain price on or before a certain date.
You could buy long-term LEAP calls if you think a stock is going higher or long-term LEAP puts if you think a stock is going lower. Unlike ordinary options, which expire in a few months or less, LEAPs do not expire for up to two and a half years. Another huge advantage of LEAPs is that they also provide you ample time for a recovery should the underlying stock move against you.
There’s more to buying a LEAP than just time value in hopes of figuring out if the stock will be higher or lower by the time they expire. With a LEAP call, you want to find stocks that are undervalued and have the potential to jump 50%-100% over the next 12 to 24 months. With a LEAP put, you want to find stocks that could tank 25%-50% or more.
Although we were stopped out of these on Black Friday when the Dubai debacle shook the market, the Netflix June 80 calls (QNQ10061900080000, $20.60, up $9.70) were at $1.65 on November 13, 2009. The stock was at $58.
We do have a few happy subscribers today because they stayed in the trade and have been emailing us all week asking our thoughts on where Netflix is headed next. Folks, some of our subs have made over a 1,000% gain on these options and we hope to have their testimonials on the website soon once they close their position. So, if you would like to see your last name in lights, send us your results.
We are always on the lookout for explosive stocks and ones that have momentum because you can see how lucrative option trading can be. We recently started a Watch List back in February so that we can add stocks that we are keeping an eye on but sometimes they don’t make it to our portfolio. However, some of the picks have been just as explosive.
Yesterday, we profiled some VMware (VMW, $60.44, down $1.22) calls options which made a 200% move from yesterday’s open into the close. That is a sweet one-day return.
The point we want to make is there are always undervalued or overvalued stocks and our goal is to get into them before the momentum picks up and we use options to maximize our gains. With the market approaching the pre-Lehman Brothers and Bear Sterns blowups traders are getting nervous since we are back to “even”. This means there are numerous sectors and stocks that are on our radar as longs and shorts.
Now, some not so good reading material…
The big push for financial reform is picking up steam and we would bet something gets done by July, if not sooner. President Obama started talking with the Dow at 11,027 and he couldn’t help but to mention Wall Street’s name within the first two minutes of his speech.
When the President was done the Dow stood at 11,050.
As the talking heads debate the impact that this bill might have on Wall Street, the market has trended slightly lower since but is still holding steady.
The Dow is at 11,044, down 80, while the S&P 500 is slipping 10 and is trading at 1,196. The Nasdaq is lower by 14 and stands at 2,490 as we head to press.