Here's an Option Play Your Can LEAP on Right Away

In yesterday's post (One Way to Profit in a Volatile Market: Options Trading 101), I described the leverage and big profit potential you can get from a simple strategy of buying call and put options.

Another options strategy I discussed on CNBC was using LEAPS options (or Long-Term Equity Anticipation Securities). I really like LEAPS because they give you similar leverage to standard options, but over a much longer time frame.

Most standard options have an expiration date that’s 30, 60, or 90 days away, and that time flies fast. But with LEAPS, you’ve got a year, 18-months, or even two-years to wait for a big market move to play out.

LEAPS Provide Extra Time for Your Strategy to Play Out

Right now, I'm following several LEAPS call options on a few emerging market ETFs that have performed well this year, but sold off in the recent correction. Some of these LEAPS look relatively cheap right now, and offer substantial upside once the market settles down. 

For instance the iShares FTSE/Xinhua China ETF (symbol: FXI) is a great case in point. This ETF offers terrific longer-term profit potential tracking China stocks, in fact it has already jumped more than 30% higher this year, even after the recent market correction.

Another way to play this potential, and at a much lower cost, is to buy LEAPS call options on FXI. For example, right now you can purchase a January 2009 LEAPS call option contract on this ETF for just over $2,000 plus brokerage commissions.

This option provides you with the “right” to the appreciation potential of 100 shares of FXI; plus you’ve got nearly a year and a half – 17 months to be exact – for this ETF to make its next big move, handing you profits on the trade.

Options Tie Up Less of Your Trading Capital

Alternatively, you could purchase 100 shares of FXI outright, but that would cost you about $15,000 – which is more than seven-times the cost of the option. Now, for many experienced investors that’s not a lot of money in the context of your total portfolio size, but it’s still fifteen grand of your capital that’s tied-up while you wait for this trade to play out.

By purchasing the FXI LEAPS instead, you’re only tying-up $2,000, and you’ve still participating in the upside potential for almost a year and a half – until January 2009.

Just to give you an idea of the upside potential that’s possible, the last time this China ETF made a big move in June and July, the near-term call options on FXI soared about 500% in just over 30 days, just take a look at the chart below!

Now, don’t expect every options trade to work out this well, because 500% is an exceptional gain, but it illustrates the point that just a handful of gains like this over the course of a year or two can provide a nice boost to your overall investment results.