Market Health

Wait Out Near-Term Volatility and Score Big

Even though Halloween is still more than a month away, the market is full of scary stories!

First, we have surging COVID-19 delta variant case numbers. The U.S. is now averaging 2,000 deaths per day, with Florida and Texas accounting for 30% of these casualties.

But there’s another contagion sparking market jitters…

The potential collapse of China’s Evergrande Group is drawing comparisons to what happened to Lehman Brothers. The ramifications of a default could be global, or they could be kept contained by the Chinese government. No one can agree on a scenario.

There’s the ever-looming threat of the Federal Reserve easing its foot off the gas.

Then, the number of days without a 5% correction continues to edge higher.

And all of this is unfolding in what’s traditionally been one of the market’s most turbulent months.

So what’s the average investor to do as the metaphorical roof leaks in so many different places?

Well, for me, this is a perfect opportunity for one of my favorite strategies. It offers the potential to score big while waiting out near-term market volatility.

By LEAPS and Bounds

A lot of newer traders fall in love with short-term options. I’m talking weekly and monthly options.

You can do all sorts of strangles and straddles.

And the action is fast-paced, with a lot of highs and lows.

It’s plenty to feast on for day traders.

But there’s another options strategy that’s less volatile, is cheaper than owning shares of the underlying company and offers a ton of upside…

Long-Term Equity Anticipation Securities – or LEAPS.

LEAPS are great when the near-term market is a mess but you know the long-term outlook is sunny. You can target severely undervalued opportunities that are ripe for a rebound in a year or two.

Plenty of investors get spooked or confused by LEAPS. But they’re merely long-dated options.

And they’re really the best of both worlds.

You have the massive upside that options allow. Plus, you’re able to take a stake in a company at a fraction of its overall share price.

And right now, with all this turbulence and choppy trading, we have a fantastic landscape for LEAPS – even after the rally we’ve enjoyed since March 2020.

Blue Skies Ahead… in 2023

As we’ve seen, the pandemic continues to cast a pall over a number of industries that really haven’t rebounded in a “two steps forward, one step back” recovery.

One of those is travel.

The U.S. Global Jets ETF (NYSE: JETS) has severely underperformed the broader indexes year to date.

The airline exchange-traded fund has been unable to gain any altitude for the last couple of months. And shares are down more than 20% from their 52-week high.

Now, I believe airlines will take off again.

But we’re in a stretch where we thought the pandemic would be in the rearview. We thought it would be a vanquished enemy choking on our chemtrails as we all blasted “Livin’ La Vida Loca” and resumed our jet-setter lifestyles.

I don’t know whether there’s an airline version of “Don’t count your chickens before they hatch.” But that’s what we – and many investors – did.

Here’s the deal though…

The International Air Transport Association forecasts air travel won’t return to pre-pandemic levels until 2023.

And this is a great setup for a LEAPS trade.

Let’s consider American Airlines (Nasdaq: AAL) as an example of the potential upside.

Shares of American Airlines are up roughly 50% from their 52-week low of $10.63 set last October. But they’re down 25% from their 52-week high of $26.09.

This year, American Airlines is projected to see revenue jump 76.2% to $30.54 billion, gaining another 39% in 2022 to $42.47 billion.

I want to point out that the 2022 figure would be equal to American Airlines’ 2017 revenue. So back above pre-pandemic levels.

More importantly, the airline’s market cap is currently a mere $13 billion. That’s well below its projected revenue.

Now, you could pay $20 for American Airlines shares. It’s fairly safe with the long-term knowledge that a rebound for air travel is in store… eventually.

For $2,000, you can own 100 shares of American Airlines.

Or you could use a LEAPS contract and pay less than $4.50 for the American Airlines June 2023 $20 calls.

That means, one contract – representing 100 shares – would ring the register at roughly $450.

What’s the probability that, 21 months from now, American Airlines shares will be trading for more than $20?

I would say pretty high.

You can position yourself for the air travel recovery in two very different ways.

Though, with LEAPS, your costs are lower with much higher potential upside.

For instance, if shares go to $30, the gain from owning just shares would be 50%. But with LEAPS, the gain would be 122%! (They cost $4.50 and would be worth $10.)

And the higher shares go, the more the LEAPS gain grows.

There’s a lot of near-term uncertainty in the market. Volatility is back. And no one can seem to pinpoint when the pandemic will finally be over.

This is the perfect environment for LEAPS. They allow you to ignore the short-term turbulence and focus on the blue skies ahead.

And the potential of this strategy is why I think every investor should be using it in their portfolios.

Here’s to high returns,

Matthew

P.S. Do you have any questions about LEAPS? Feel free to leave them in the comments below.

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