When it comes to options and growth stocks, there is enormous potential to capture big premiums. If you select time periods that are quite far out, called LEAPs, you have the chance to make very big money with some limitations on risk.
Growth stocks can be dangerous beasts, because if growth flags while you own the stock, the stock could get hammered in a selloff. However, growth stocks tend to grow for quite some time if you catch them early enough in their cycle. That’s why you can make money by selling covered calls many months out, or naked puts, if you prefer.
It’s best to choose a growth stock for LEAPs that doesn’t appear to be in big trouble as far as keeping its growth phase up. Here are three examples of stocks that make great candidates for LEAPs.
Chipotle Mexican Grill (CMG)
Chipotle Mexican Grill (CMG) is an amazing company and an amazing stock, with a fantastic balance sheet. It is a definite growth stock. You could buy CMG stock here at $672, and sell the January 2016 $680 call LEAP for about $81.
That means you’ll collect $8,100 up front. Nice. If CMG stock breaches $660 before then, which it likely will, it could be called away at any time. If it doesn’t, then you’ve picked up that great premium. You are also protected down to $590, should the stock fall over the next 15 months.
Another play I like, if you don’t want to hold CMG stock, is to sell the January 2016 $600 put LEAP for $56. You pick up $5,600 right now, and if the stock closes under $600 before expiration, you will have the stock put to you, but at an effective price of $544.
Google (GOOG)
Another growth stock worthy of consideration is Google (GOOG), which likely won’t see growth flag anytime soon. GOOG stock presently trades at $577 and has $90 per share in cash, meaning its effective price is $488.
If you sold the January 2016 $640 call LEAPs for $42, you’d collect a fab $4,200 in premium today, and you have a $52 buffer zone between now and expiration before GOOG stock got called away. If it did, you’d make a total of $9,400, which is around 16%.
Or you could sell the January 2016 $540 put LEAPs for $40. You pick up $4,000 today, and give yourself a room for a 10% drop in the stock before having any risk of it being put to you. Even then, GOOGL stock gets put to you at an effective price of $500, and then backing out the cash position, you effectively have the stock at $410 per share.
Netflix (NFLX)
Finally, you can give Netflix (NFLX) a spin. The stock is at $465. I’m a bit leery of NFLX stock because of its inherent volatility and bizarre finances, but the market doesn’t seem to care and keeps bidding it up.
So if you want to buy the stock, sell the January $450 call LEAPs for $68. Grab that $6,800 up front now, and wait around for expiration. You have downside protection all the way to $412.
Alternatively, you could sell the January 2016 $400 naked put LEAPs for $43. You still collect a juicy $4,300 right now, and have downside protection all the way down to $357.
I’d be particularly careful with NFLX stock. The market is in love with it right now, but I don’t think the stock price is justified considering what the company is truly worth. It’s for the most speculative of investors only.
Lawrence Meyers does not have a position in any security mentioned.
