From 5 months ago, time for an update — how did we do?
We were successful, see details at the end of this post.

Yesterday was March 25th and it was 5 months ago on October 25th that I wrote an article on this Stock Market Basics website called “Leaps for the Small Trader” that suggested how a trader could take a speculative position in some of the high priced issues and instead of buying stocks, buy a very long term option known as a LEAP (Long-term Equity Anticipation Security).

Here and now
An explanation of LEAPs and the full text of that article can be found with this link: About Leaps. But here and now I just want to see how the values of the LEAP options mentioned may have changed to see whether my suggestion of buying leaps really was a good alternative to buying stocks.

Suggested paper trades as of October 25
The trades were based on quoted prices for that day, they were all Calls, “in the money” by a small amount with expiration date of January 2012.

Please Note: Options terms are explained elsewhere on this site, check the List of Topics under the subhead “Stock Options” for more information on this very interesting form of lower-cost trading alternatives to buying stocks when working capital is limited.

Showing the then and now quoted prices, the stocks referred to on the October 25 post were:

Apple (AAPL stock at @ $308) $300 call @ $52.50 Now $73.10 = + 39%

Amazon (AMZN stock at @$169) $160 call @ $34.00 Now $29.20 = – 12%

AutoZone (AZO stock at @ $235) $220 call @ $34.00 Now $44.30 = + 30%

International Business Machines (IBM stock at @ $140) $135 call @ $16.00 Now $30.25 = + 90%

Netflix (NFLX stock at @ $167) $165 call @ $40.00 Now $82.26 = +
105%

Conclusion
I believe the results of our paper trading confirm that the strategy of buying options instead of buying stocks is a worthwhile approach to trading high priced stocks.

4 out of 5 show very good gains, with just 1 loss in the group at this date. But even on that one, it is too early to exit and take a loss. Before the recent downturn, which looks as if it might be ending, AMZN was at its high of the last 52 weeks at around $190, and a quick look at a chart – our major trading tool for guidance — shows that AMZN looks to be resuming its upward trend and should then rejoin the others in the plus column.

Not all are winners
But before we conclude that it’s an easy and automatic winning alternative to buying stocks that are expensive, I have to say that in my original post of October 25 I was fortunate to be able to select particular stocks that later have turned out to be winners — but a lot of other possible high-priced stocks that I could have added to the list have not done so well — for instance Google then a $616 now 580, Goldman Sachs then $157 now 158, Mastercard then $245 now 248. However, it is still early in the life of the LEAPs, they expire in January 2012, and I do believe that when the market resumes its upward trend, the Google, Goldman, and Mastercard stocks and their LEAPs will provide good gains for anyone who holds them — perhaps we should review in a few months time.

Please note, the above listed details refer to “paper stock trades” used as examples only but not be actually traded with real money, however the details are valid, exactly as they would have been for real trade, only the broker commissions have not been factored in, a relatively small cost. In the course of learning the basics of stock market trading it helps to define specific real-time trades in this paper trading way as part of the learning process.

Also, there is much more basic stock market information available in the accompanying posts on this Stock Market Basics Guide website. This information can contribute to building a knowledge base for the beginning trader. Other articles can be found on the List of Topics for this site.
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How to find options prices on the internet — it’s free
To find a list of options prices, referred to as the Option Chain:

  1. Go to http://finance.yahoo.com/ and enter the desired stock symbol in the blank box at the top left of the Home Page, for example, AAPL
  2. Click the Get Quotes button which will take you to the up to date summary page of Apple Inc.
  3. Next, on the sidebar at left, click on Options (about the 3rd or 4th entry down) and that will take you to a table of options for the next expiry date which is always the third Friday of the month, if it is past the current month’s third Friday it will be that of the next month. The expiry date of the table displayed is highlighted at the top.
  4. Options are available for various lengths of time and the several expiry dates are listed at the top of the table. Click on the date required, in the case of the LEAPs discussed above the Jan 12 would be clicked which would then take you to the complete list of quotes for that stock’s options.

The Jan 12 refers to the month and year, January, 2012, the actual expiry date is the third Friday of that month, entered on the table as “Expire at close Friday, January 20, 2012”.

Related posts:

  1. Trading the NASDAQ Index with ETFs and Options as an Alternative to Buying Shares
  2. Stock Market Basics and LEAPS for the Small Trader
  3. A Case for Buying Options Instead of Buying Stocks
  4. Buying Stocks or Buying an ETF (Exchange Traded Fund)
  5. Buying stocks — But First, Before We Start
  6. Yes, Indexes Signal It’s Time for Buying Stocks
  7. At Last, Charts Signal Time for Buying Stocks? Maybe!

Filed under: Stock Market Basics

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