Every now and then, it may be worth considering using options to hedge or speculate on various large-scale events taking place in the market. As we know, the country will have a new president late next year. It is difficult to predict how the overall stock market, or even individual sectors, will perform in response to the outcome.
One way to do this is through the use of LEAPs, which are options designed for dates that are at least a year out. Each option is called a LEAP, or a Long-Term Equity Anticipation Security. You are “leaping” ahead at least a year in anticipation of a certain event.
LEAPs are really for the most speculative of investors, or for those particularly concerned about broad market movements, especially to the downside. These are just my thoughts on might occur.
Let’s look at three stocks that offer attractive LEAPs:
3 LEAPs to Bet Before the 2016 Election: Joy Global Inc. (JOY)
I think if a true conservative wins the White House, there will be several sectors that benefit. I think a big winner will be the coal sector. The present administration really seems intent on killing it.
Joy Global Inc. (NYSE:JOY) is the better-known coal play in the market. It manufactures and services mining equipment for many natural resources, of which coal is a big part of its business. JOY stock has really been hammered over the past year, down 40% from its 52-week high and 60% from its all-time high.
The Jan 2017 LEAPs are what I’m looking at. If you think the coal industry will rally, then consider buying the Jan 2017 $38 call LEAP for $6.75. You are only spending about $100 more per contract that the $40 strike, and the $38 strike already puts you in the money.
JOY stock could get worse in the interim, though. You could hedge your downside risk by buying the Jan 2017 $33 put LEAP for $3.80.
3 LEAPs to Bet Before the 2016 Election: Lockheed Martin Corporation (LMT)
I think the same situation might exist for the defense sector. A conservative is likely going to push Congress to increase defense spending. That sector is already a strong play no matter who is in charge, but I think it could see a nice boost under these circumstances.
The sector’s ETFs don’t have options, so I might select one of the big players, such as Lockheed Martin Corporation (NYSE:LMT).
The stock trades about 5% off LMT’s all-time high of around $207. I think here you may want to think about the Jan 2017 $210 call LEAP, which sells for $11. Because the market previously valued the company around $207, it is entirely possible the stock may revisit those levels even before 2017. You’ve got almost two years to see if it does, and my guess is that it probably will.
If there is a boost from the election, then you’ll break even if the stock is at $221. It’s not an unreasonable possibility.
3 LEAPs to Bet Before the 2016 Election: Financial Select Sector SPDR Fund (XLF)
The other place I’d look is the financial sector. The banks and similar businesses have been saddled with enormous new compliance costs under Dodd-Frank. The government does silly things like institute price controls on processing fees, and that forces the financials to seek out other ways of boosting revenue.
It’s possible that a conservative president will neuter Dodd-Frank or try to get rid of it altogether. That could mean big savings for the financials and a corresponding boost to earnings per share.
The move here might be to look at the Financial Select Sector SPDR ETF (NYSEARCA:XLF). All the biggest names are here and the top 10 holdings account for 48% of assets.
XLF stock trades at $24.11. I think buying the Jan 2017 $24 call LEAP for $2.15 is a cheap way to pursue this strategy.
If you choose the LEAPs process, be alert as we get into election season in 2016. If a front-runner emerges, you may see the market anticipate the move with a strong reaction — that may be a good time to sell.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.