The Strategy That I Use to Supercharge My Stock returns

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Investing in the stock market can seem daunting if you are a beginner.

In fact, most end up taking a passive approach by investing in boring Index funds & ETFs that provide safe, predictable returns.

Others make the leap to investing in individual stocks which can be deemed riskier but provide more upside potential depending on how good you are as a stock picker.

If you are a little more savvy, you will sell put options to buy into the stock at a lower price whilst collecting that juicy premium.

But there is another way of being bullish on a stock without actually buying the shares and at the same time, lowering your potential risk whilst leveraging your returns.

It always sounds too good to be true, doesn’t it?

The strategy that I am referring to is called LEAPS which is an abbreviation for Long-term Equity Anticipation Securities.

Put simply, it’s when you buy or sell options that have an expiration date of at least 1 year.

What does this exactly mean?

You are essentially taking advantage of the time value (theta) to leverage your returns without needing to buy the stock outright.

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Choosing A Stock To Trade LEAPS

Currently, I am bullish on the stock Schlumberger NV over the long term which has been trending downwards recently, partly due to falling oil prices.

I viewed this as a great buying opportunity since the business has a strong balance sheet and I believe that Schlumberger will benefit from the geopolitical tensions & macroeconomic uncertainties that the world is currently facing.

Timing the market is never a good idea but based on my own analysis, I predict Schlumberger to appreciate in value over the next 2 years.

I am expecting inflation to pick up again in the coming years as a result of the Fed lowering interest rates and printing more money to help pay off that huge $35 trillion debt. This will inevitably result in higher energy prices which will benefit Schlumberger.

The Trade Breakdown

I will use an example of a trade I placed to help you better understand how LEAPS work.

As shown in the below screenshot, I bought 10 call contracts of Schlumberger on October 29th, 2024 with an expiration date of January 15th, 2027 and strike price of $35.

The cost of the leap call option was $11.00. Since 1 contract is 100 shares, the 10 contracts ended up costing me $11,000 before commissions.

What does all of this mean?

Put simply, I have paid $11,000 for the right to buy 1,000 shares of Schlumberger on January 15th, 2027 for $35.

This means that for $11,000, I am essentially controlling 1,000 shares of Schlumberger via the 10 call options that I bought.

As of November 1st, 2024, Schlumberger is trading at around $40 so if I were to buy 1,000 shares outright, I would have had to pay around $40,000.

But as a result of using LEAPS, I was able to get similar exposure for almost a quarter of the price whilst limiting my downside risk as the most I could lose is the $11,000 premium that I paid.

How do you make money with LEAPS?

Good question, at the end of the day we are trying to make a nice profit which you can do in abundance with LEAPS.

As mentioned earlier in my example, the strike price that I chose was $35. This was intentional as I wanted the strike price to be in-the-money.

What do I mean by that?

Essentially, I am picking a future strike price that is lower than the current share price which increases the chances of the trade being profitable by lowering my break even price.

The break even price is calculated by adding the $35 strike price with the $11 premium that I paid per share so I will be in profit if Schlumberger trades above $46 at the expiration date of January 15th, 2027.

Another reason why I chose an in-the-money strike price is due to the higher delta.

Delta basically measures how much an option’s price will move as a result of a $1 move in the underlying stock and the further in-the-money the LEAPS is, the higher the delta.

Do note that the further in-the-money you go with the strike price, the more premium you will pay but the higher delta means that the option value will move almost dollar-for-dollar with the stock so it is almost like owning the stock itself.

This is the key to supercharging your returns. Because, once the break even price has been reached, your leap option increases by close to a dollar for every dollar that the underlying stock increases.

Going back to the Schlumberger trade, I only paid $11,000 to control 1,000 shares worth $40,000 so my returns are getting leveraged with leaps once the share price is above the $46 break even price.

Do I need to wait years to realise profits with LEAPS?

Absolutely not.

Although the expiration date that we choose with LEAPS are usually at least 1 year in the future, this does not mean that you have to wait that long to profit.

With the LEAPS trade that I made for Schlumberger, I am waiting for the stock price to spike within the next 2 years and once it is sufficiently over the break even price of $46, I will close my LEAPS trade by selling it and collecting a premium that will be more than the $11,000 premium that I initially paid.

Final Thoughts

In summary, buying LEAPS enables you to leverage your returns as a result of investing less capital to control a large amount of stock which also means that you are lowering your downside risk as well.

It is a great alternative to margin trading because of the defined risk which is limited to the premium that you pay upfront whilst being able to capture most of the upside of owning the shares outright as long as the delta is close to 1.