by Karim Rahemtulla, Advisory Panelist
Wednesday, September 9, 2009: Issue #1088

So what’s the better investment – stocks or LEAP options?

As I’ve explained in recent columns, LEAPS are long-term options that expire in one to two years or more. So it’s an effective strategy if your outlook is a couple of years ahead at most.

And the best part is that LEAPS allow you to participate in the moves of the underlying stock (either up or down), for a fraction of what it would cost you to buy the shares outright.

So let’s compare a regular stock investing strategy with LEAP options, using the following guidelines. This is purely as an example…

The Stock Strategy

Here are the initial parameters of the stock strategy example:

• Cash to invest: $1,000,000
• Stocks to hold: 20 – Buy 1,000 shares of each, priced at $50 a share
• Timeframe: Two years
• Stop-loss: 20%
• Upside target: 30% across the board over two years (from $50 to $65)

Given that we’re looking for a 30% gain from each position, our maximum profit is $300,000. And our 20% stop-loss means the maximum loss would theoretically be $200,000.

The LEAP Strategy

Basically, we’re going to replicate the parameters above using LEAP options instead of regular shares.

• Strike price: $50 for each stock
• Cost of LEAP: $6. That’s $6,000 for each at-the-money LEAP.
• Timeframe: Two years
• Stop-loss: None
• Upside target: 30% on the underlying stocks (from $50 to $65)

Based on that guide, we’ll invest a total of $120,000 in the LEAPS positions in order to replicate the share position.

So right off the bat, that’s $880,000 less than we’d shell out for the shares outright. We’ll dump it in an account that yields 2% interest per year, which will generate about $30,000.

Stocks vs. LEAPS: Who Wins?

• The Stock Portfolio: Based on the $65 target being achieved for the stocks after two years, the portfolio will be worth 30% more ($1,300,000). Remember, though, we had $1 million at risk and capped our loss at $200,000, given the 20% stop-loss.
• The LEAP Portfolio: With each stock sitting at the $65 target price, each LEAP option is worth $15 – a 150% gain from the $6 we paid for each contract.

The combined portfolio would thus be worth $300,000 at expiration – a “net gain” of $180,000 ($300,000 minus the $120,000 we originally invested). But in fact, the actual return is even higher, since we received $30,000 by using the cash we didn’t spend on the stock portfolio to generate income for us. So our actual net outlay has dropped to $90,000 in order to make $210,000 net.

And as for the most we can lose… well, it’s capped at $90,000 – a far cry from the $200,000 at risk in the stock portfolio.

So the question you have to ask yourself, based on the above example, is whether you want to spend $1,000,000 and risk $200,000, or spend $90,000, with your risk also capped at that amount. Your answer will determine whether you are a LEAPS investor or not.

Karim Rahemtulla

Editor’s Note: For more information on how Karim uses LEAP options to lower cost and lower risk while still producing some outstanding upside returns, take a look at his 400 Report trading service. Just recently, for example, Karim closed out an 80% win on Bank of America January 2011 calls and a 161% profit on Petrobras. Follow this link to find out how to get specific recommendations like this from Karim – and give yourself a chance to enjoy profits, too.

by Karim Rahemtulla, Advisory Panelist
Tuesday, September 15, 2009: Issue #1093

Most of the time, we’re no fans of Wall Street analysts. They’re often behind-the curve, biased, and flat out wrong.

But sometimes, we make exceptions – especially when their over-zealous attitude causes a stock to blast higher and hand us triple-digit gains.

I remember one such occurrence in particular with a high-tech company that we own in our Xclerated Profits Report portfolio. Thanks to some giddy CNBC analysts pumping up the price, the stock surged from $6 to $20 and we took half our position off the table for a gain of more than 100%.

The small-cap stock has suffered along with the broader market, but there’s no doubt that its business is viable. It’s leading the way in the field of touch screen and force-feedback technology – otherwise known as “haptics.” In short, this simplifies and enhances human interaction with technology in a variety of ways.

Cellphones… Games… Cars… Healthcare… This Technology is Everywhere

You’ve probably used the company’s tactile feedback technology and don’t even know it.

• For example, its technology is what causes cellphones to vibrate when they ring, or you get a message. And the company has licensed the technology to major firms like Nokia, Samsung, Motorola, and LG.
• It’s also present in video games, which gives gamers a more interactive, realistic experience, as the action on the screen is “forced” back into the controller.
• Elsewhere, it’s used in the auto industry in dashboard instruments, the casino industry in gaming machines, and the medical industry, in helping to train surgeons and doctors by replicating the behavior of the human body.

The company holds hundreds of patents and it recently signed a deal with a major chip company, a move that an influential analyst called a “game changer.”

In short, we spotted the vast potential well before Wall Street and we’re looking for another triple-digit win on the stock. And if that happens, we’ll adopt the same practice that we always do – one that you should use in your own investing…

The Name of the Game is Profits

We have a hard and fast rule at the Xcelerated Profits Report: We don’t discriminate when it comes to profits. That means if we have a winner of 100%-plus, we take our money off the table. This is true for stocks or options.

We did this last week when we sold half our shares in the gold company Golden Star Resources (NYSE: GSS) for a cool 103% gain in just a couple of months. But what makes this trade even sweeter is that we bought the shares using the proceeds from call options that we sold on another gold stock we’ve owned for a while – Yamana Gold (NYSE: AUY).

Come options expiration in January, if Yamana is trading above $6.75 per share or thereabouts (it’s currently close to $11), we’ll have essentially bought the shares of GSS for nothing.

And speaking of gold, I’ve made another play in the upcoming October Xcelerated Profits Report issue, due out at the end of this week. But it’s a play with a twist – we’re taking a “show me” stance on gold prices, arguing that gold is either going to soar or plunge from current levels. What’s more, we’ll make it do so for about $3. If you’re looking for exposure to gold, or to hedge against a price drop, you don’t want to miss it.

The bottom line is that we don’t just make picks. We take our ideas and then figure out how to turn them into “xcelerated” profits by using straightforward investment strategies that many other investors don’t know about. We teach, then we trade.

Good investing,

Karim Rahemtulla