I’ve become increasingly enamored by LEAP (or, longer-term) options, which allow you to make bets on a stock far into the future, particularly as a way to speculate on momentum stocks.
The tricky thing about “mo-mo” stocks isn’t just that they rattle and shake like Southern California in an earthquake. Rather, it’s that those movements may have nothing to do with what’s actually happening at an individual company.
One thing is certain, however. An earnings blowout or miss will send the stock skyrocketing or crashing. LEAPS are also useful when dealing with companies that have just announced groundbreaking news that may change their game plan.
Here are three names that you can trade for the longer term, and I’ll share with you which options look best right now.
Please note, however, that the gap between the bid and the ask spreads can be fairly wide on these longer-dated options, so be sure to use limit orders to get the best-possible entry prices.
Trade # 1: Coinstar
For a long time, Coinstar (NASDAQ:CSTR) was all about counting your excess change. Then it made the brilliant move of creating the automated video-rental store Redbox, which served to further disrupt the movie rental industry.
This week’s earnings report not only blew away estimates (by 50%!), but the company announced a strategic partnership with Verizon (NYSE:VZ) to begin streaming video content. This is yet another attack on Netflix (NASDAQ:NFLX), which I am bearish about in the long term but cautious about shorting in the near term.
So, does Coinstar make a meaningful impact on its business with this streaming model? Well, licensing content is mighty expensive, and it’s becoming a competitive space. Of course, that brings up some longer-term questions. Does the Redbox model continue to work going forward? What else might positively or negatively impact results? Should you own the shares?
The stock seems pricey, but that doesn’t mean we can’t make money in the intermediate term, for a fraction of the cost of stock ownership, with its longer-dated options. I’m more bullish than bearish on this name, so it’s a perfect LEAP opportunity.
Here you can buy the CSTR January (2013) 65 Call for $5.40. You risk $540 a contract instead of $5,700 for the shares. And if the stock is trading above $70.40 ($65 strike + $5.40 call price) come next January, you win.
Given the $7 jump the stock had from its earnings report, it’s entirely possible this will happen. The stock also has a relatively low float, so it could become a momentum stock overnight.
Trade # 2: Imax
Another stock worth examining is IMAX (NASDAQ:IMAX). Again, I am substantially bearish on the company’s long-term prospects. The near term, however, is a different story.
The company is expanding its installations, and the revenue from these installs plus box-office rev-share deals may juice it before it falls apart. Here, you should look out a long way for a trade. You can buy the IMAX January (2014) 25 Calls for $3.70.
Given that IMAX has been a momentum stock in the past, this is a low-risk way to play that momentum. Because it is impossible to predict IMAX’s revenue and earnings due to the rev-share aspect of its business, this is exactly the circumstance to use a LEAP.
However, if you want to go the other way and bet on a stock price collapse, you can buy the IMAX January (2014) 20 Puts for $5.30 instead.
Trade # 3: First Solar
Solar stocks are totally unpredictable. Frankly, I don’t think they’ll ever succeed in the long run because they require government subsidies somewhere along the manufacturing or purchase chain. But that doesn’t mean you can’t make money from them as those issues get hammered out.
If Obama gets re-elected, solar will remain a play. If not, they still may, but the odds go down. So once again, you can bet either way on these.
If you’re bullish, then look at First Solar (NASDAQ:FSLR) and at buying the FSLR January (2014) 60 Calls for $8.75. If solar really makes a go of it, you’ve bought in cheap.
If solar hits roadblocks, and you buy the FSLR January (2014) 35 Puts for $8.25, you may be a winner. Two years is an eternity in this business, after all.
Lawrence Meyers does not own shares of any company mentioned.