Many traders struggle to capitalize on significant market moves because their accounts are not large enough to invest in high-priced stocks such as Nvidia, Meta, or Netflix. There comes a point when frustration sets in, and they “just can’t help but watch others reap enormous profits from those same moves.”
Utilize option-based strategies, namely Long-Term Equity Anticipation Securities (LEAPS), to allow these people to start “playing” with leverage-on-the-cash that these big accounts possess.
By purchasing call options, traders can control 100 shares of a stock for a fraction of the cost, leveraging potential gains while minimizing upfront capital requirements.
Understanding LEAPS (Long-Term Equity Anticipation Securities)
LEAPS are long-term option contracts, usually extended for over a year, having the right to purchase (or sell) a stock at an established price. They are one of the most potent tools in the hands of traders to maximize their gains with limited capital.
Why LEAPS?
- LEAPS offer traders exposure to stock moves without buying stocks outright.
- That reduces the capital outlay enormously.
Case Study: Nvidia Stock (2023)
Let us illustrate the potential of LEAPS in relation to Nvidia’s performance.
Background
The stock price of Nvidia underwent a ramp through an explosion in AI technologies.
On January 19, 2023, Nvidia was trading at $169. A low-capital trader wishes to buy a one-year expiration LEAPS 160-strike call option.
Comparison of Cost and Profit
| Scenario | LEAPS Option | Buying 100 Shares |
|---|---|---|
| Cost | $4,140 | $16,962 |
| After 1 Year | $43,430 | $59,491 |
| Profit | $39,290 | $42,519 |
| Return on Investment | ~900% | ~250% |
Important Note: Using LEAPS, the profit a trader captures is nearly equivalent to buying 100 shares, but the capital invested is relatively very small.
Advantages of the LEAPS Strategy
- Leverage: Control 100 shares of a stock for a fraction of the cost.
- Flexibility: One can participate in high-growth stocks without requiring a lot of capital.
- Scalability: With a modest amount of capital, one can buy several LEAPS contracts to leverage their returns.
Risks of the LEAPS Strategy
The payoffs are tempting, but so are the risks:
- Time Decay: Options decay in value as they approach expiration.
- Break-even Point: The stock price needs to move up enough to cover the cost of the option.
- Total Loss Potential: If the stock closes at or below the strike price, the option can expire worthless.
Why This Strategy Succeeds with Small Accounts
- Capital Efficiency: The cost to buy a LEAPS option is much cheaper than buying shares outright.
- Risk Management: LEAPS allow traders to risk a known amount—the price of the option—rather than risking a larger amount to the whims of the market.
- Levitated Gains: A small movement in the stock price results in significant gains given the level of leverage used.
How to Do This Strategy
Select the Stock
- Select a stock that is likely to make a significant rise, such as those in sectors that are on a trend and include AI, technology, or renewable energy.
- Choose a strike price close to the current price of the stock to maximize leverage.
Choose Expiration Date
- Target LEAPS that will expire over a year from now.
- There will be plenty of time for the trade to develop.
Track the Trade
- Keep watching how the stock performs.
- Sell the option if your profit target is achieved prior to expiration.
The LEAPS strategy provides an incredible opportunity for traders with small accounts to capitalize on significant market movements. Using call options, you can participate in lucrative trades at a fraction of the cost, achieving returns that rival those of larger investors.
If you are more interested in trading with more sophisticated options strategies, then you could attend workshops and training programs for the improvement of your trading. With the right knowledge and equipment, even tiny accounts can create big results.