LEAPS Create Leverage
Leverage can allow for substantial returns as a trend follower. Leverage allow traders to use a small amount of capital to control a larger sum.
An S&P 500 futures contract may require $20,000 in margin per contract. Each contract controls $283,750 worth of the S&P 500 cash index. Each contract is leveraged at 14 to 1. Each dollar you put up controls $14. Gains and losses are calculated on the larger amount. This can produce substantial returns.
LEAPS allow traders to profit from movement in the underlying stock. If you purchase a LEAP call and the market rises, your LEAP should increase in value.
| Market Examples | |||
| Issue | Cost of 100 shares | Cost of LEAP | Leverage Created |
| Coca Cola (NYSE: KO) | $5,169 | $420 | 12.3 |
| IBM (NYSE: IBM) | $9,941 | $1,160 | 8.56 |
| Boeing (NYSE: BA) | $4,949 | $850 | 5.82 |
| UAL Corp (NYSE: UAL) | $1,463 | $660 | 2.21 |
| Merck (NYSE: MRK) | $5,704 | $680 | 8.39 |
