LEAPing Into The New Year--How Long Term Options Can Boost Your Portfolios Return

|
Includes: GM, O
by: Mitchell Harris

Summary

Protect your downside.

Grab some attractive premiums to invest elsewhere.

Keep your long term strategy in place.

I know the market is "oversold" down here, and I think we may have hit the bottom. As you all know, you are never going to catch the bottom for an entrance, or the top for the exit. Somewhere in between there is enough for everyone to make some nice money. Over the years I have been very selective on the stocks I choose for writing covered LEAPS. I think there is some real value in this current market for LEAP writing. If you have long positions you really want to hold for years, then write on half the position. Keep in mind I do not target stocks that got absolutely crushed, and blow through their 52 week lows. I would like to see a trading range before I write LEAPS. Here are some of my picks right now. As always, please message me with any ideas you have, I like to offer feedback to my followers.

Abbott Labs (NYSE:ABT) is currently trading at $37.40 and did get beaten down the other day, though their earnings report was not terrible. The "street" from time to time punishes for ok reports, as all of us are well aware. The January $40 strike call for 2017 is paying $2.30, representing a 6.1% premium. If the long position gets called away, add roughly 7% in gains, and don't forget the 2.5% dividend. 15% is an attractive return for an aggressive position, but this is big pharma which tends to be more conservative. That adds to my excitement about going long here and writing the referenced LEAP.

General Motors (NYSE:GM) is a household name, and you will be presently surprised at the returns offered with positioning yourself with the stock at $29.32. It is 5 points from its 52 week low and 9 points from its high, so there is some room for upside. The $32 strike call for 2017 is paying $1.70, a 5.7% premium. If the position gets called away you can tack on 9% in gains and who wouldn't love that dividend at 4.9%. Some analysts think GM is a ho hum type of stock, but to be honest a 19% return in 12 month time frame just might be enough to park a new Caddy in your driveway!

Realty Income (NYSE:O) is probably one of the best managed REIT's in the USA. 4400 properties in 49 states and an occupancy rate of close to 98%. Walgreens, Fedex, CVS and Walmart are some of their largest tenants. At $55.60 the stock is up 1% in the past 52 weeks which has outpaced every index. The current yield is 4.3% which isn't to fat, and don't be afraid of the 205% payout ratio, their lease structure keeps costs down, plus they pay monthly which investors love. This is a straight premium play, and it is only until September 2016. The $55 call strike is netting $2.70, roughly 5% in premiums. That plus the dividend will net you close to 10% for 8 months. If you believe it will trade higher than that, and do not want to lose the dividend, I suggest writing the $60 calls strike for the same month and grab $1.30. I honestly don't think it trades that high, but you never know. That return would be pretty impressive. Either way it is a winning trade on a steady REIT investment. Typically I would prefer higher yields but this particular REIT is a core holding in my opinion.

Good luck, and please send me any feedback you may have. Thanks!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.