Wednesday, June 18, 2008

The leaps advantages

Leaps have many advantages over other strategies in the stock market. This is because they give the buyer both high leverage and a long term approach to the market.

Leaps like options give the owner the right to buy a given stock on or before a given date. But unlike options however the date at which it expires is farther out. Instead of an option contract which might give you a couple months before it expires, a leap will give you a year or two before it expires.

This has a few great advantages. First of all the stock does not always do what you want to do right away. That does not necessarily mean that you change your posture on the stock. If you had a leap you could hold onto it longer without having to worry about expiration.

Another reason is that if a stock is strong it may pull back now and then. However, if it is really a great buy it is likely go head up in a longer term time frame.

Of course you do pay more to buy a leap then you would for a call option. But you pay for time. That extra money makes the investment gives you more time than a call would.

They have advantage over stocks as well. That is because they have much greater leverage then a stock does. For instance say you buy a $40 leap for $8 that is two years out. The stock is trading at $35.

After two years that same stock is trading at $60. If you would have bought the stock you would have made 71.42%. But if you would have bought the leap it would be worth at least $20. That would have given you a gain of at least 150%.

There is a big difference between the return the stock could give you and the returns a leap could give you.

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