Long-term options are known as “LEAPs,” and they are one way to play situations that may take a long time to work through. So when you have a stock that everyone calls “dead money,” buying or selling LEAPs might be a way to take advantage of that stagnation.
Alternatively, when it comes to blue-chip stocks (and dead money situations), you can take on a position you favor, but may not want to take on a bunch of risk. LEAPs for those blue-chip stocks might make sense looking out over the next year and a half.
However, you have to be selective. Because of the extended time factors involved, premiums on LEAPs for blue-chip stocks can be very high. You don’t want to overspend on speculation.
Oftentimes, I will buy LEAPs for blue-chip stocks that are very much out of the money, willing to give up near-term or smaller returns because I think I can achieve higher returns with less capital exposure.
Let’s take a look at blue-chip leaps to buy for 2018.
Blue-Chip LEAPs to Buy: Raytheon Company (RTN)
Defense stocks offer an interesting possible play for LEAPs on blue-chip stocks. Let’s take Raytheon Company (NYSE:RTN).
RTN isn’t just an American defense company. It does deals with countries all over the world. We know several things when it comes to defense stocks. Namely, the world is always at war and threats aren’t going away. And defense stocks do well with Democratic administrations and even better with Republican ones.
RTN is at its all-time high around $138. If Clinton wins in November, we should expect much of a change in RTN business. However, my sense is that Donald Trump is going to be a lot more serious, more aggressive and more pugilistic regarding American defense. So it wouldn’t surprise me to see more of the federal budget allocated to it.
The Jan 2018 $140 calls are selling for $11. RTN has doubled over the past three years. A gain of 10% over the next 18 months seems like a slam dunk. Not to mention you’ll also make back $4.40 in dividends during that period.
Blue-Chip LEAPs to Buy: Las Vegas Sands Corp. (LVS)
Las Vegas Sands Corp. (NYSE:LVS) is one of the biggest casino operators in the world. It’s not news that China’s crackdown on wealthy people has smacked Macau gaming revenues in a very big way.
The casinos have started to see a little bit more business filter through in the high-roller arena recently. That’s not to say the crackdown is over, but it has been going on for a long time; and in another 18 months, one would think that business might be returning to normal.
LVS stock has gotten hammered, and is still down 50% from its all-time high. Yet that creates a great opportunity, because at $43.60, LVS stock is barely 10% off its low.
There is a great opportunity to buy the Jan 2019 call $45 for $4.90. That means LVS only needs to rise 15% in the next 18 months for you to profit while only having $490 at stake.
Blue-Chip LEAPs to Buy: Apple Inc. (AAPL)
What would an article about blue-chip stocks be without mentioning Apple Inc. (NASDAQ:AAPL). Apple stock has been taking it on the chin, down 37% from its high because of recent earnings, and because 70% of its revenue is tied to the iPhone.
Yet I would hardly count Apple stock out. It has so much darn money that if it wants to buy its way into another revenue stream, it can do so easily.
So we have to ask if Tim Cook can turn things around in the next 18 months, enough to send Apple stock higher? AAPL is at $96 today. The Jan 2018 $95 calls are selling for $12.10, so you have to ask yourself if AAPL could trade up to $108 in the next 18 months.
Uh … yes. Yes, it can, and I think it will. One good quarter could send the stock up $15 in a day.
As of this writing, Lawrence Meyers was long AAPL.