Our economic situation will only get worse before it gets better… even President-elect Barack Obama will tell you that. But with a plan to get the economy moving again, Obama recovery efforts are, at least, in the works.
Yep, in an effort to revitalize the U.S. economy and put millions back to work, Obama is vowing to invest heavily in the country’s infrastructure, which could rain millions of dollars on energy-efficient buildings, roads, bridges, schools, sewer systems, mass transit, and electrical grids.
"We need action — and action now," said the president-elect after Friday’s posted loss of 533,000 jobs, sending the unemployment rate to a 15-year high. "The key for us is making sure that we jump-start that economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term, sustainable economic growth."
With that in mind, you’d be foolish not to invest in the very infrastructure stocks that could benefit… especially beaten down stocks like:
- Fluor (FLR), which fell from hundred dollar highs to less than $50, is one of the largest engineering, construction, and maintenance companies in the world.
- Foster Wheeler (FWLT), which plummeted from $80 to less than $20…
- Shaw Group (SGR), which fell from about $70 to $12…
- URS Corporation (URS), which fell from about $55 to less than $20…
- KBR (KBR), which fell from $40 highs to about $10…
- Even Mexico’s Cemex (CX) jumped on hopes that infrastructure investment plans would translate into higher sales for the U.S. cement supplier.
Sure, each of them has already run a bit on the news. But there’s still further upside for them all, as a direction-less economy hopes to find direction with Obama.
But do keep in mind that the infrastructure plan won’t happen overnight. It’s only in the works right now. But here are two ways to fully maximize long-term gains.
How to Buy LEAP Options… and Maximize Your Gains…
There are two ways to fully maximize your potential gains. One is to buy the underlying stock in each, diversifying your portfolio. Another is to buy long-term options LEAPS.
Sure, options aren’t for some of you. Some don’t have the interest. Others just don’t know enough about them. But, as Options Trading Pit readers will tell you, options are not difficult to master.
In fact, here are some the basics to investing in option LEAPS.
Say you’re anticipating an advance in the price of a stock option over the next two years, but don’t want exposure to time decay issues.
Say stock ABC, as of December 2007, is trading at $60 a share, and a two-year LEAPS call with a strike price of $60 is trading at $5. You could buy five of these LEAPS call contracts for $2,500, (initial cost $5) x # of shares in an options contract (100 x 5 contracts equals $2,500).
These five calls now give you the right to buy 500 shares of ABC between now and expiration at $60, no matter how high the stock rises. Your break-even point would be $65, or the strike price plus the premium paid.
Now, say your LEAPS, with a strike price of $60, soars to $75 by expiration. You have two options: You can exercise the five call contracts and own the stock by paying $60 a share, or you can exit the LEAPS position for a gain. If at the time of expiration, the stock traded at $75, you’d have a gain of about $7,500 (five contracts multiplied by 100 minus the total of your cost per contract, multiplied by the price increase of, in this case, 15).
Now, remove the premium you paid ($5) and multiply that by the number of contracts (again multiplied by 100, which gives you your contract price), which comes out to $2,500.
After removing the premium paid, your total profit would be $5,000, or about 200%. Had you bought the underlying stock at $60 and rode it to $75, you’d only have a gain of about 25%.
Confused? Take your time. It’s very easy once you get the hang of it. Here’s the profit difference when you exit the LEAPS call, as compared to exiting the stock.
Exit 5 LEAPS ABC 5 Call
Initial Cost ($5) x # of shares in contract (100) = $500
Cost ($5) x # of shares in contract (100) x exit price ($15) = $7,500
Profit before commission and removing premium = $7,500
Exit 500 shares of ABC at $60
Initial Cost = $30,000
If the stock rises to $75, you’re profit is $7,500 (does not include commission).
LEAPS Investing: Advantageous Leverage
LEAPS cost only a fraction of owning a stock. And they’ve been known to rocket higher as the underlying price moves. Say you own a $50 stock, and it goes up $5. Your gain is 10%. But say you own the January 50 calls, for example, at $1 and the stock went up $5. You could now be sitting on 400% gains.
That’s how you maximize your potential gains. Not by worrying about time decay, or making scant gains from holding overpriced stocks.
- Your risk is known.
- You can buy LEAPS calls if you think a stock is rising. You can buy LEAPS puts if you think a stock is heading lower. There’s a lack of time decay.
- You can play "big picture" trends, using commodities such as gold. Say the dollar gets weaker. Investors run to gold as a safe haven, and you own the XAU LEAPS that’ll leverage your gains when gold moves in "your" direction.
Stay tuned for more on options investing tips in Wealth Daily and Options Trading Pit.
Ian L. Cooper