There comes a moment in every ambitious investor's career when they just simply wish they could limit their loss potential while still retaining much of the upside capacity of a given transaction. For investors that utilize Long-Term Equity Anticipation Securities (LEAPS), such a possibility exists with the acceptance of additional risk. The following basic strategy utilizes the use of long-term call options and remains ill-advised for those who lack the understanding of how such investment tools function.
Though it's often not recommended for investors to "bet the farm" on a given equity, the very mentality can be more safely applied with the use of LEAPS. For those who are speculatively bullish on a particular company, buying to open such long-dated call options can initiate a position at a fraction of the cost for a near-equivalent return possibility over a well-defined time period. The use of LEAPS are in many ways ideal for speculative value plays. For companies resting at or near their market lows, leveraging one's return on such investments by utilizing significantly less capital is a value proposition that can often tip the scales for those willing to place a bet on their recoveries.
Yet in each of these instances, it's advisable that the appropriate due diligence still remains as a critical component towards every investment decision. Just because a long-term call option may cost less than owning the stock outright, the additional risk of how little price action the underlying equity must endure in order to lose the holder's entire investment should continue to weigh heavily as a constant reality. In the very least, an adequate understanding of the underlying issues that have allowed for such discounted prices should also be complemented with the very optimistic rationale as to why a recovery should occur in the defined time period allotted by the set expiration date.
As stated, therefore, the following list offer a few possibilities to consider. In each of these instances, the January 2014 expiration date serves as a default setting. This is the case as the limitation of time will almost always serve as the greatest enemy to the call holder in light of progressive decay of the option's time value as one waits for the underlying stock's recovery. The bid and asks prices utilize the first strike price located out-of-the-money in respects to the last share price of the company. All values were taken as of March 17, 2012.
|Name||52-Wk Change%||Last Price||Strike Price||Jan14 Ask Price||Industry|
|DryShips (NASDAQ:DRYS)||(21.55%)||$3.64||$4||$1.2||Bulk Shipping & UDW Drilling|
|First Solar (NASDAQ:FSLR)||(80.64%)||$29.08||$30||$9.3||Solar Panels|
|American Superconductor (NASDAQ:AMSC)||(81.55%)||$4.36||$5||$1.75||Wind Power|
|Hewlett-Packard (NYSE:HPQ)||(41.37%)||$24.49||$25||$4.05||Computer Services|
Dryships. General distrust for the management along with ever worsening conditions for the dry bulk shipping sector has grounded this company in a price range far below it's book value would justify. With over a 70% share in Ocean Rig (NASDAQ:ORIG), the company's diversification into the ultra deepwater drilling sector has provided a rare and stable source of income to offset the hard times being experienced on the shipping side. Yet with a price-to-book ratio of 0.32 along with a reasonable P/E of 8.67, the company's recent bump in share price could indicate a sizeable recovery in the near-term future.
First Solar. Management woes, continual guidance revisions to the down side, repealed subsidies, and a market that is struggling to make a profit, First Solar has had many reasons for investors to run away and not look back. Yet as an American-based company that has clearly held a leading position in the industry, First Solar has continued to expect ongoing profitability even as its competitors have struggled to break even in the current economic environment.
ArcelorMittal. Still hurting from fears of a lasting European recession, ArcelorMittal was adversely affected as the world's largest steel supplier when the world began to panic. Yet still paying a sizeable dividend, maintaining a profitable outlook, and currently trading with a price-to-book ratio of 0.56, the company likely stands to have much upside potential barring an industry-freezing disaster.
American Superconductor. Once a leader in the space of wind power generation, a devastating fallout with their largest client escalated to accusations of corporate espionage. Yet as the formerly well-capitalized company slowly treads down the path of recovery, a more-than-possible settlement with China's Sinovel could spell out an accelerated bump in the company's value. Having filed multiple lawsuits that seek more than $1.2 billion in damages, any favorable result could have a significant impact on the company that is currently valued with a $224 million market capitalization.
Hewlett-Packard. Bad corporate moves when it comes to making acquisitions, retaining talented management, and even defining the company's direction have all helped knocked this dominant player around. Yet still priced as if they're on the brink of falling apart tomorrow, an eventual return to stable profitability is the more likely outcome for this tech giant. HP still retains significant market shares in its many businesses and though bound to suffer in respects to future growth, the company's current discount is leveling off and may have factored in a little too much fear. With a low forward-looking P/E ratio under 6, a mid-term recovery isn't a far-fetched expectation.