A few ideas
I mentioned before that I’ve used LEAPS in SunPower, and here’s why. My investment thesis is that SunPower is vastly undervalued, and as the market realizes the potential of solar, the stock will skyrocket. I recently wrote that it isn’t unreasonable to put a valuation of $80 or more on the stock. If this thesis is correct, then options are a great tool.
Today, you could buy the stock or buy calls that would make your exposure much higher. Below is a table that lays out how much exposure you would have with a $10,000 investment and what the breakeven is versus the stock. If the option expires below the strike price, you would be out 100% of your initial investment. Between the strike and the breakeven (right column), it would have been better to buy the stock. But if the stock goes above breakeven, options are the best choice.
| Price | Shares of Exposure ($10,000 investment) | Breakeven vs. Buying Stock | |
|---|---|---|---|
| Stock | $13.39 | 746.8 | $13.39 |
| Jan 2015 $12 Call | $5.10 | 1,960.8 | $19.38 |
| Jan 2015 $17 Call | $3.30 | 3,030.3 | $22.56 |
Just look at how many shares of exposure you get with options versus owning the stock. If the stock grows anywhere near the rate I think it will, then options are the best choice.
Of course, options come with risks, such as total capital loss. If this risk isn’t for you, then neither are options.
Another idea is buying way-out-of-the-money LEAPS in Apple Inc. (NASDAQ:AAPL). There are a lot of investors (myself included) who think Apple Inc. (NASDAQ:AAPL) is vastly undervalued, and if the stock moves significantly higher, options can be a good play. January 2015 $700 call options are currently trading at $14.30 — not bad for a two-year option. The stock has already reached that level once, and with two years to turn around, this is an investment I’m considering. And I’m not the only one: It was announced yesterday that David Einhorn owns $146 million in Apple call options — exactly the trade I’m talking about.
On the flip side, companies you want to bet against can be used as option plays as well. Research In Motion Ltd (NASDAQ:BBRY) BlackBerry has been on a tear recently, but with the stock at $14.36 and the company’s future in question, puts are intriguing. The 52-week low is $6.22, and a January 2015 $10 put can be had for $2.52. If the company goes belly-up in that time, you could quadruple your money.
A few things to think about
Options aren’t for the faint of heart, and they can leave you out your entire initial outlay, so use them carefully. They’re also best with stocks that are projected to move a lot, so they’re not suitable for every investment.
The article It’s Time to Take a Look at Options originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium manages an account that owns shares of Apple and SunPower. Travis Hoium personally owns shares of SunPower and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, and Long Jan 2015 $15 Calls on SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
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