Bottarelli on LEAPS

In a minute, we’ll get to the interview with options trader Bryan Bottarelli. But first, I want to address Obama’s speech from last night. 

It seems pretty clear to me that Obama is proposing a re-structuring of the U.S. economy. Healthcare, education, and energy were specifically mentioned as areas where change is necessary. And I don’t think you can look at any of these areas and say that the current course is going to lead us where we want to be.

With healthcare, I have no problem with a doctor who is motivated by profits. I do have a problem paying exorbitant fees to HMOs to distribute care. With energy, I have no problem with OPEC countries getting as much per barrel of oil as they can. If we don’t like it, we can get moving on alternatives. 

Healthcare costs, gasoline and energy prices, even the housing bubble and the subsequent crash, act as silent taxes on Americans incomes. Much of our resources are wasted or not efficiently used. I’m all for changing that. But the ultimate questions are: Can it be done? And Can Obama do it? 

Thanks, and here’s Bryan Bottarelli… 

*****Last month, we ran an exclusive interview with Bryan Bottarelli, editor and founder of Bottarelli Research. In response to this interview, we received numerous inquiries from Daily Profit readers who wanted to know more about Bottarelli’s trading strategies without having to follow the markets daily. Based on these requests, we followed up with Bottarelli, who told us that he recently launched a new service called Bottarelli Research LEAPS.  

This new service is designed to profit without committing more than 15 minutes of your time each week to follow the markets. After hearing this news, we once again pulled up a chair with Bottarelli to examine this new methodology. 

Bryan, I understand you have a new LEAPS service. Can you explain LEAPS in simple terms? 

The idea of a LEAPS option is rather simple. By definition, LEAPS are “Long-Term Equity Anticipation Securities.” This basically means they’re publicly traded options contracts with expiration dates that are longer than one year.  

Therefore, you’re essentially combining the benefits of stock ownership with the benefits of options trading. As a result, you’re left with a longer-term LEAPS position on a company that offers you an incredible amount of leverage. And since you can own call or put options, you can profit whether the markets move up or down. 

Often times, a well-placed LEAP can make you returns of5x to 10x morethan a standard stock position. Best of all, you can make these tremendous returns by committing far less up-front capital than a typical stock purchase.  

In my view, LEAPS are the perfect investment vehicle for any investor wanting to achieve large gains with strictly limited risk. 

How do LEAPS differ from options? 

Structurally, LEAPS are no different than short-term options. That is to say, they gain and lose value using the same formula as short-term options. The only difference is that LEAPS contain expiration dates that are much longer in duration than a standard short-term option. Therefore, LEAPS are the perfect way for a “buy and hold” investor to gain experience in the world of options trading. 

Since LEAPS carry expiration dates up to one full year in the future, you have the flexibility to sell your LEAPS anytime during this holding period. In other words, the prolonged expiration date offers you the opportunity to gain exposure to price changes without needing to trade in and out of your positions on a daily basis. So once again, the benefit of LEAPS is that they offer you tremendous upside earnings potential in both up and down markets (which is critically important in today’s volatile and uncertain times). And at the same time, they only require that you check your account for a few minutes each week. 

What makes trading LEAPS so profitable? You talk about 50% to 400% gains in three or four months. How is this done? 

In my experience, when you own a super-leveraged LEAPS position with plenty of time to mature, patience often leads to phenomenal returns. Consider the example of the Dow Diamond Trust (NYSE:DIA). 

The DIA seeks investment results that generally correspond to the price performance of the Dow Jones Industrial Average. In March of 2008, the DIA traded for $130 per share. At this time, let’s say that you thought to yourself, “Man, this stock market does not look good. The financials are in trouble, and it could lead to major losses around the globe. I’d like to buy some LEAPS options that will gain value if the DIA drops in price.” 

In response to this thinking process, let’s say you decided to use LEAPS puts, which are designed to gain value as the markets move lower. Specifically, you purchased the DIA January 130 Puts (YCK MZ), which gave you the right (but not the obligation) to sell 100 shares of the DIA for $130 anytime before the third week in January 2010. You paid a total of $8.65 to own this right. 

After making this purchase, I’m sure you know what happened next. The Dow fell like a rock, and the DIA moved from $130 down to $75, good for a –57% loss. That’s quite a substantial fall, but consider this: 

In response to this down-move, the DIA January 130 Puts (YCK MZ) that you originally purchased for $8.65 moved all the up to $56.50, good for a whopping 553% gain.

By purchasing the DIA January 2010 puts, you owned a LEAPS contract that allowed you to make money as the Dow Jones Industrial Average fell in price. 

Plus, since this position does not expire until January of 2010, you have no urgency to trade “in and out” of it like a day trader. You simply make the buy, then sit back and wait for the markets to fall. Meanwhile, most “buy and hold” investors are losing their shirts. 

Is this a good strategy to use in volatile market climates? How much risk is involved? 

If the example above is any indication, then this answer is a resounding “yes!” As you can see, you could’ve made 553% at the same time that the Dow dropped 57%. Break this down, and for every 10% that the Dow fell, you made 100%. I’ll take that ratio any day of the week. In fact, in volatile markets such as this, there is simply no better way to protect yourself against steep market losses. 

In terms of risk, your total risk on any LEAPS play is no different than your total risk on any stock investment. That is, you can only lose the amount that you have invested. Not a penny more. Not only that, but in Bottarelli Research LEAPS, we also use a methodology called the “Scaled Selling Technique,” which gives you pre-set sell targets. That way, you know ahead of time exactly what price you should sell. Plus, by setting a stop order, we also protect your investment from steep losses. By correctly applying this safety strategy, you’ll never lose more than 50% of your original investment. 

Is this a strategy that can be used by all investors — in retirement, close to retirement and nowhere near retirement? 

The strategy that we use in Bottarelli Research LEAPS is perfect for anyone who can check their account once each week. Therefore, I personally feel that it’s right for investors of every age, income bracket, or background. 

You see, buying a LEAP is not much different than buying a stock. The main difference is that you’re entering a 5-letter symbol for a LEAP instead of a 3- or 4-letter symbol for a stock. And, as I mentioned, most LEAPS have expiration dates ranging from 12 to 24 months. That’s plenty of time to achieve powerful returns. Think about it like this … 

In a volatile market, you should not be holding any asset longer than two years anyway! Therefore, this 12 to 24 month time horizon works perfectly in today’s market conditions. 

We’ve already had three really strong LEAPS winners in 2009. I’ll briefly describe each one below. 

Right now, I’d recommend the following three companies:

 LEAPS Trade #1: CBOE Volatility Index (VIX): Commonly known as the “fear-gauge,” the VIX is an index that moves up as the markets move down. Considering that the Dow just set a new 52-week low, it makes sense to own a position that makes you money as the markets move south. In fact, if we experience another violent sell-off (similar to what we experienced in October and November), you could see the VIX move from current levels around 50 back up to their recent highs at 80. I don’t know about you, but in my opinion, never before has the global marketplace been so fragile. Therefore, to reflect this high level of global fear, you could realistically see the VIX break out to levels that you’ve never seen before. To profit off this move, I’ve recommended that my LEAPS members own LEAPS calls on the VIX. 

LEAPS Trade #2: Celgene Corporation (Nasdaq:CELG): I consider CELG to be one of the most promising biotech companies on the market. In fact, you can argue that investing in CELG today is like buying shares of Amgen very early in their growth cycle. CELG’s three main cancer drugs (Revlimid, Thalomid and Vidaza) bring in around $560 million per quarter, making CELG one of the most profitable and stable biotech companies your money can buy. And in times of recession, owing a biotech company with a powerful revenue stream makes a lot of sense. CELG expects to earn total revenues of $2.6 billion in 2009, up 20% from 2008 levels. At the same time, CELG has a loaded pipeline, with clinical trials for incurable tumor cancers. CELG lost only 3.26% over the last 52 weeks, far outpacing the S&P 500’s loss of 35.5%. I’ve recommended that my LEAPS members own LEAPS calls on the CELG. 

LEAPS Trade #3: Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX): FCX specializes in a wide range of metals, including copper, gold, molybdenum and silver – from properties located in Indonesia, North America, South America and Africa. As of last December, FCX had recoverable proven and probable reserves of 93.2 billion pounds of copper, 41 million ounces of gold, 2 billion pounds of molybdenum, 230 million ounces of silver, and 0.6 billion pounds of cobalt. As you can see, that’s a massive amount of metal, which makes FCX one of the strongest all-around metals plays your money can buy. 

Considering that FCX is sitting on 93.2 billion pounds of copper, that’s clearly the primary upside price trigger. Now, I’m sure you know that copper got clobbered in 2008, which pushed FCX down 75% last year. But if you look closely, you’ll notice that the luster is quietly starting to return to copper.

This past January, for example, was the first month that copper prices rose since June of 2008. In January, copper prices increased 3.4%, which helped FCX gain 20% year-to-date. Based on that ratio, simple math tells you that Wall Street pushes shares of FCX 5.8% higher for every 1% that copper prices move up. That’s really nice leverage, especially with copper prices so low. Going forward, any promising news (or even news that is less bad than expected) from the construction, housing, or electrical markets could be an upside catalyst for copper – and thus push FCX higher. To profit off this up-move, I’ve recommended that my LEAPS members own LEAPS calls on the FCX. 

*IMPORTANT NOTE FOR ALL DAILY PROFIT READERS: If you’d like to learn more about LEAPS, Bottarelli has reserved 35 spaces for any Daily Profit reader interested in becoming part of this investment service. For more details, click on the link below.