No. of Recommendations: 4
"If my memory serves me well a couple of years ago there were some good threads here on buying LEAP options for BMW stocks instead of the common....If anyone followed that strategy it would be interesting to hear your 'verdict'." - Dave302

My verdict is "Great Idea! I love it!"

My main investment in the last year and a half was Abbott Labs LEAPs. I wrote about it here at the time. What my wife and I did was to buy the $45JAN13 LEAP Calls and sold the $45JAN13 LEAP puts. The Puts sold for $6.40 and the calls cost us $6.05. Thus, we took $0.35/share off the table and waited for Mr.(or Mrs.)Market to come to his(or her)senses.

At the time the price of ABT common shares was at $46 plus some change while my BMW Method charts showed that price to be historically too low. Meanwhile, we already owned way too many shares of ABT and did not need more. However, what I wrote about here was my opinion that these trades were essentialy risk free for us.

My wife and I have never sold ABT shares and do not intend to so in the future. So, if the stock went lower, we would ride the price down, whether we owned the LEAPs or not. But, we believed that ABT was destined to go higher...based on the BMW Method. So, if we were correct, our LEAP put would expire worthless and the LEAP call would likely double in price. However, if we were wrong and the price went down to the point that our options were likely to be called/put, we could sell our existing shares and let the transaction go through. In the end, we would still own our same position, and all we would lose would be the transaction costs.

I suggested this as a nice tactic for doubling down on any stocks you own but wish to hold. If the price is historically low, and you do the DD and find that the future is looking just peachy, why not use this a "Collar" to make some extra bucks? If you have already bought 1000 shares at a price you liked, why not double down with the collar? You make a few bucks up front and, in the worst case, you can sell your shares and have the Put shares put to you. The call will expire worthless. If the share price is in the money, you can sell the call and let the put expire worthless. The ket is, you must believe in your own DD.

As it turned out for us, The PUT is still active and priced today at $1.58/share while the call is priced at $9.35/share. Actually, we sold the calls several months ago at $10.83/share for a very nice gain. We are still holding the PUTS and fully expect them to expire worthless. But, as of today we are looking at a total gain of $9.60/share with the potential of seeing $11.18/share if we wait for January 2013 to roll around. We could buy back the PUT, but we still think $45/share is ridiculously low for ABT.

So, based on personal experience, my verdict is "Great Idea! I love it!" The key is to "KNOW" that the market has mis-priced the equity you like. Of course, none of us can know that for sure, but history tells us what is statistically most likely. Now, I lost quite a bit of money back in 2008 using this same approach on bank stocks, but I did not "Know" nearly as much about banking as I do about Abbott Labs. That was my fault...shame on me! I believed that banks were acting like banks had always acted in the past. It never occurred to me that they might be acting like idiots, loaning money to people with no credit, no money down and without significant background checks. So, caveat emptor on my "collar" technique. Make sure the market is screwed up and not your own assumptions. Plus, I did not own the bank stocks I was using the collar on. Owning the shares changes your perspective significantly. At least, It does for me.

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