Here we are at year’s end — the perfect time to look at some blue-chip stocks, and the LEAPS you can trade against them.
For those who don’t know, LEAPS — or Long-term Equity AnticiPation Securities — are options that extend out a year or more in terms of expiration dates.
I generally don’t trade these very much, but every now and then there is some kind of existential issue facing a particular stock that may not resolve for some time. As a result, the stock may be enjoying a massive winning streak, or it may be getting clobbered by the market because there’s some issue that is short- to medium-term in nature.
One important thing to keep in mind: LEAPS on blue-chip stocks can be expensive. Because there is both time and volatility elements that figure into an option’s premium pricing, the time factor becomes very big here. So you want to choose blue-chip stocks that you think have big moves ahead.
These three blue chips are perfect examples:
LEAPS on Blue-Chip Stocks: Wynn Resorts, Limited (WYNN)
Wynn Resorts (WYNN) is a perfect example of blue-chip stocks set for a move. WYNN is almost 75% off its 2014 high amid a Chinese crackdown on corruption.
Much of the focus has been on the rich, and because they want to keep a low profile and not attract attention, they’ve been staying far away from Macau. As a result, gaming and resort revenues over there have been hit very hard.
However, this is going to turn around at some point. The reason is that the Chinese government has to wake up every day and figure how to feed and shelter 2 billion people. They don’t need unrest, so they crack down on rich people to keep that unrest at bay.
Eventually the crackdown will end, and WYNN should roar back.
WYNN stock trades at $64. The Jan 2017 $80 calls are priced at $8.65. So if WYNN breaks $88.65 between now and then, you are a winner … and I think that’s very likely.
LEAPS on Blue Chips: Apple Inc. (AAPL)
I think next year will be a tough one for the market. That means you may be able to buy blue-chip stocks like Apple (AAPL) at a lower price than its present $107. Sure, you could buy it now — and given that I consider it the ultimate growth-at-a-reasonable-price stock, there’s nothing wrong with that.
However, if you want to hedge your bets a little (and that’s what options are for when it comes to blue chips), there’s another way to play this game.
Sell some naked puts. That means you’ll collect a premium, and if AAPL falls below your strike price before expiration, you’ll also get to buy the stock at that lower price.
The Jan 2017 $100 puts are selling for $9.50. So you pick up $950 now, and might get Apple stock put to you at $100.
(Naturally, you’ll want to make sure you have enough in reserve to eat that elephant if it happens.)
LEAPS on Blue Chips: SPDR S&P 500 ETF Trust (SPY)
As I said, I think 2016 is not going to be a good year for the market. I believe it will be flat to down. However, as an advocate for holding a long-term diversified portfolio, I’m also not much for rejiggering your positions too much based on what might happen. You should stay the course for your broad portfolio.
However, I also believe in having money set aside to trade options in order to enhance returns.
If you are feeling a bit skittish about the coming year, then why not hedge your portfolio with an options play directed at blue-chip stocks as a whole?
I’m talking about a play with the SPDR S&P 500 ETF Trust (SPY).
Yes, the SPY is hardly a stock, but at $180 billion in assets, it’s about as blue-chippy an exchange-traded fund as you could ask for. Plus, it holds 500 blue-chip companies. Good enough for me.
Anyway, in this case, you could buy some puts to hedge the portfolio. If the market falls, your puts become worth more and more. The SPY trades at $202. It’s a bit of a pricey move, but you could buy the January 2017 $200 puts for $16.40.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
