When you buy a leap, do you buy in the money or out of the money just after the stock splits?? It seems that just after the split the options come back down to normal? (July 30, 2001)
Buying LEAPS is a strategy we do like as we can get more bang for our buck so to speak than buying shares of stock as LEAPS, being options, cost less than the stock. Also, LEAPS are treated about the same as stock, and we can write calls on them to increase our returns. We have control of more shares of stock with the same amount of money, and we can still write calls on them. That gives us more cash generating capability. We always look for ways to make our money work harder for us.
We like to buy LEAPS 4 to 5 strikes in the money, and that usually allows us to buy them at a price it would cost us to buy the stock on full margin (i.e., at about 50% of the cost of the stock). The price varies depending upon the volatility, but LEAPS, being longer term options (a year or more), tend to have less volatility than shorter term options.
As to when we buy them, we often do so when we would normally buy a stock, i.e., when it is ready to make a good move based on its pattern, earnings, revenues, etc. LEAPS are similar to stock, so we treat entry points the same. They split just as stock splits, so if you have 10 contracts of LEAPS and the stock splits 2 for 1, you have 20 contracts after the split. That gives us even more cash generating potential. We like LEAPS and we discuss them in detail in our Covered Calls and Protecting Your Downside seminar.
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