How to use leap call options for serious investing

Leap call options are simply call options that are good for 1 to 2 years.

A call or put option is a contract that controls 100 shares of a stock.

The call option is used when you believe a stock is going up.

The put option is used when you believe a stock is going down.

The purpose of a leap call is safety and profit.

My best profits have been made when I have not played more then 20 bucks out of the money.

That means if a stock is fifty dollars a share, a 70 dollar option is 20 bucks out

of the money. A 50 buck stock option would be considered an in the money play.

2 stocks that I play are stock symbol 'Ibm' and 'Cat'

Ibm is a fast moving stock that can be easily played 20 bucks out of the money.

Cat is a slower mover and you may want to only play 10 bucks out of the money.

If you play to far out of the money, you will lose time premium and even though the stock has moved up 5 bucks, you might only make 10 cents on the dollar.

Ie 50 cents for 5 buck move or 50 bucks profit per contract.

This example is perfectly shown by ibm and its jan 2010 140 leap call Wibah

at 101 about 10days ago I payed 500 per contract for this stock option.

now at 109 on 2/1/08 this option has a bid of 540 and an ask of 620.

THIS IS AN ACTUAL TRADE I DID THIS YEAR

ie I played 40 bucks out of the money and I made 90 bucks as the selling price or the bid price was 450 when the ask was 520 when i bought in

I had placed a limit buy order of 500 because My experience has shown I can shave 10-20 bucks off an ask price on a volitile day.

And thats exactly what happened.

Now I have made 10 cents on the dollar or 40-60 bucks a contract profit.

the option can be sold for 540 or maybe 560 and since i payed 500 a contract

thats 40-60 a contract profit 40 is a guarantee

So lets examine the results.

4 ibm leap contracts wibah.o cost 2000 and have made 4 times 40 or 160 profit.

thats over 8% return.

4 times 60 would be 240 or 12% profit

If I had bought 50 shares of the pure stock for a cost of over 5000 based on the 101 per share price

I would have only made 9 times 50 or 450 profit.

ie less then 10% in the same time period and 2.5 times more money at risk.

Now if i had spent the money for a 120 option my profit would have been 30 cents on the dollar or more, as the option would only be 11 bucks out of the money instead of 31 like mine is.

4 contracts would have probably cost 1200 each with ibm at 101 so 5000 would have been spent.

The profit would be 9 times 30 worse case or 270 per contract. 4 contracts times 270 is 1080 gross return on a 5k investment ie 20%

200 of this profit would usually cover the bid ask spread on either trade and therefore your net profit would be about 5% less.

If the option average was 40 cents on the dollar my return is 360 times 4 or 1440.

Thats almost 30% return, on a 5k investment

Thats much better then the 450 return if I had only bought 5k of pure ibm stock at 101 a share.

My only sugestions are,DONT GET GREEDY, play only leap call options, and go out as far as you can.

I have been playing jan 2010 expiration leaps since aug -sept of 2007.

I LIKE SAFETY

good luck