Tackle Investing Risk With LEAPS
The disclaimer we’re tasked with repeating most often in this industry is this: Of course, all investing carries risk.
And it’s true.
When you put money in the market, there will always be a chance that your investment will fail or end up worthless. That’s high risk.
But if you never invest at all, you’ll never grow that money. That’s no risk. And if you didn’t think the potential upside was worth having at least some skin in the game, you probably wouldn’t be reading this article.
Here at The Oxford Club, our job is to find the sweet spot for risk tolerance. And today, I’m going to explain how assuming even a little risk can pay off in a big way.
Typically, equities are grouped into two categories: stocks and options.
Stocks are shares of companies that you own. The returns may be generous over the long term, but you’re not likely to be able to buy a car in cash after owning a single stock for two years.
Options – specifically call options – are similar in that when you buy them you reserve the right to buy shares of a company at a predetermined price, called the strike price. Investors in these pay a premium upfront and make a bet that the underlying asset will rise above the strike price before expiration.
If the price of the asset soars, your gain potential jumps exponentially.
Most of the options plays that we recommend at The Oxford Club are short-term plays – having less than nine months until expiration. This makes them high risk.
But there’s a safer way to speculate…
There’s a way to turbocharge your gains to the tune of what you often see with short-term options… but with the added safety of a long-term time horizon.
They’re called Long-Term Equity Anticipation Securities – more popularly referred to as LEAPS.
LEAPS trade in the same way as short-term options, but the added time until maturity makes the investment less susceptible to volatility and market tantrums.
This kind of trade also gives you plenty of time to take profits or recover losses. With a long-term investment, you don’t have to worry about this quarter’s earnings report or even next year’s. You’re concerned with the overall trend, which is hopefully an upward one.
It’s important to understand that this kind of investment will tie up your funds for a longer period of time, usually around two to three years. So if you’ll need the money in six months, this isn’t the play for you.
Another factor to consider is the kind of taxable event you create when you sell an option. LEAPS are eligible for the more favorable long-term capital gains tax rate. If you hold on to LEAPS for more than one year, your gains will be taxed up to 15% (though, high-income individuals may be taxed up to 20%). Whereas the gains from short-term options sold exactly one year after buying (or sooner) will be taxed at your normal income bracket rate.
To buy LEAPS, you’ll also need a brokerage account with permissions to buy options contracts. It’s up to each brokerage to decide when to let you buy calls, but the factors in its decision will include your experience as a trader and the total equity in your account.
If you are new to options trading and are buying only one or two contracts at a time (equaling 100 or 200 shares), you can get started easily on a free trading platform, like Robinhood (Nasdaq: HOOD).
Chief Trends Strategist Matthew Carr and Engineering Strategist David Fessler have traded LEAPS successfully throughout their careers. And they’ve been rewarded with a number of 10-bagger winners.
Here’s an example…
On June 8, 2020, Matthew recommended buying LEAPS on the technology disrupter Square (NYSE: SQ) to his paid subscribers. Between then and mid-September 2021, the stock gained a beautiful 185%.
But if you had bought the January 2022 $135 long-term options that Matthew recommended, you would have been up an incredible 1,061% (with peak gains of nearly 1,500% last February)!
This is exactly what we will attempt to replicate – time and time again – in the brand-new Oxford Growth Investor.
Of course, if you do not understand LEAPS or cannot assume that kind of risk, do not make these trades. I highly recommend doing further research through our education-based content on Investment U.
As you have heard ad nauseam, all investing carries risk.
But we believe buying long-term options, or LEAPS, is the safest and lowest-risk way to play a traditionally high-risk game.
Stick with us, and we’ll show you how it’s done.