Taking The LEAP Into Stock Options

Reserving the right to purchase stock later offers both risk and reward. Here's how to carefully get a handle on it all.

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Deciding whether a LEAP option works for you hinges on a checklist of several items–much the same things you mull over when purchasing a stock. Start with your view of the overall stock market; a positive assessment helps. Experts say you should then be sure to research a company much the same way you would if you were buying shares. “Sometimes LEAPs are like buying a stock on the layaway plan,” says Biebel. “Still, individual investors had better be sure they like the company they’re investing in.”

The difference between plunking your money down on a stock and investing in a LEAP, though; boils down to certainty. If you’re absolutely sure a stock will rise, or if you’re comfortable with prospects ahead, go with the plain-vanilla shares. If you’re a bit tentative or wary, then LEAPs could be a good way to go if you’re willing to take the risk. Lewis has another piece of advice: stick to big names with good reputations because they offer more liquidity. “Since this is a pretty big bet to take, you want to make sure things are as certain as they can be,” he says.

To better illustrate times when LEAPs make sense, we’ve assembled the following scenarios, based on market circumstances as of press time.

The high flyer. It’s hard not to look at a stock like America On Line and not be a little intimidated. AOL shares keep rising as if they’re on helium, and currently the stock’s price-to-earnings (P/E) ratio–286 based on 1998 projected earnings, compared to 22 for the S&P 500-has extended beyond the speed of light. Then, again, if the Internet is as big as everyone says, AOL could very well be the next Microsoft, another stock that traded at astronomical P/Es early on and has delighted investors ever since.

Here, LEAPs help guarantee you a seat on the AOL rocket ship at a minimal risk. AOL shares were trading at $75 as of April 16. A LEAP call on 100 shares of AOL expiring in January 2000 with an $80 strike price was selling at $19, an investment that would total $1,900 per contract.

A temporary snoozer. Computer maker Compaq looks like it might be a mover and shaker in its industry for years to come. But with Asia batting technology stocks about like flies and computer prices dropping below $1,000 in some cases, Compaq shares have gone into hibernation.

In this case, a LEAP allows you to keep a finger in Compaq’s shares without risking a lot of money. As of April 16, with Compaq shares trading at $25, a LEAP call expiring in January 2000 with a strike price of $30 cost $6 per share. Essentially, that’s a $600 wager that Compaq shares could rise more than $5 in the next two years.

Catch a speeding bullet. Like all drug stocks, Pfizer has zipped along during the past year to a little over $100 a share. It’s P/E, meanwhile, has ballooned to 56 times 1998 earnings, more than

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