Instead, you could buy a LEAPS call option that gives you the right to buy 100 shares of Apple for $60 each at any time before Jan. 17, 2025. The contracts are trading for about $96, so the cost would be $9,600 to get upside exposure to 100 shares -- a significantly lower capital outlay.
Now let’s say that Apple rises to $200 per share by the expiration date, making 100 shares worth $20,000. If you had simply bought the stock, you’d have a gain of $4,800, a 32% gain on your initial cost, plus whatever dividends you received along the way. Note: If you hold options contracts, you get no dividends.
On the other hand, if you had bought a LEAPS call option with a $60 strike price for $9,600 and sold it just before the expiration date with the stock trading for $200, you would likely receive about $14,000 -- the difference between the exercise cost of the option and the value of the stock, and a 46% gain on your initial investment.
LEAPS as a hedge
Now let’s say that you own 100 shares of Apple and you’re worried about a catastrophic event causing the stock’s price to plunge. So, you buy a LEAPS put contract expiring Jan. 17, 2025, with a strike price of $100, giving you the right to sell the stock for $100 per share at any time before that date. Even if Apple were to plunge to $0 (unlikely), the contract would guarantee you $100.
You pay $5.00 for the contract ($500 total for the 100 shares). If Apple’s stock stays over $100, the contract expires worthless, and you lose your $500. However, if the stock falls below $100, you’ll certainly be glad you bought it.