Today’s Lesson: Stocks… long term.
One great feature of the futures, options and FX markets is the leverage. You can start with a modest account relative to stock trading. You get better capital utilization. More bang for your buck.
It’s hard to NOT trade stocks, though. The selection is second to none. The returns over time can be incredible. The 10-year returns for NFLX +2100%, AMZN +1930%, MSFT +1112%, the list goes on. The capital efficiency is not great though. You can do better with options.
I’m surprised by how many people I talk to don’t realize that you can buy options on stocks with long term expiration dates. One year, 18 months, two years. They’re called LEAPS (Long-Term Equity Anticipation Securities). You’ll give up the dividend benefit (if any) but you’ll get great leverage and capital utilization.
Here's an example. My long-term viewpoint on Ford Motors is bullish. Their commitment to the Electric Vehicle space, solid earnings, and manufacturing prowess all suggested to me that they could be a major player or a major acquisition by some company that starts with a T.
Should I buy the stock or the LEAPS? At the time I bought, the stock was trading at $17 and the Jan 2023 LEAPS were $3.00 offering 5.5X leverage. The difference in return is huge. With Ford at 19.39 now my return is around 40%, the stock owner would be up 14%.
The other obvious benefit is stock selection. Many people would love to own NFLX or AMZN or TSLA but can’t afford a meaningful position. With LEAPS offering 4:1 or 5:1 leverage “ownership” (more like “renting”) becomes possible.
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