LEAP Spreads To Return 125%-Plus For 2012

by: Phil Fragasso

In yesterday’s article I highlighted ten buy-write trades that would return 12% or more in a flat market. And while a 12% return is nothing to turn away from, many of us prefer a more aggressive strategy for higher returns with concomitantly higher risk levels. So I’ve taken a look at the same ten stocks and illustrated vertical bull spreads using January 2013 LEAPs that would all return 125% or more (excluding trading costs).
In each case, the long position has a near-the-money strike (which, in my opinion, reduces the overall risk of the trade) and the short strike is usually 15% to 20% higher.
Here’s how to read the table, using Caterpillar (NYSE:CAT) as an example. On Tuesday, December 27, CAT closed at $91.55. You could have bought a January 2013 call with a strike price of $90.00 for $14.20, and sold a $110 call for $6.40. Your net cost (and maximum loss) would be $7.80. Your maximum gain would be $12.20 or 156.4%.
I don’t generally advocate LEAP spreads for several reasons: You tie up your money for an extended period of time, and (due to the time value premium) the gains tend to be realized in the last few months of the holding period. Nonetheless, if you can live with these caveats, you can probably live with potential returns of 125%.
Click to enlarge.

Disclosure: I am long AAPL, CAT, FCX, HAL, IP, JPM, MOS, PRU, QCOM.