You should rarely bet on long-term options in a taxable account, Fool contributor Tim Beyers says in the following video.
Why? Taxes. LEAPS, or long-term equity appreciation securities, are options to buy (or sell) stock at a certain "strike" price within a defined time period -- 18 months to two years is typical.
Profits collected after holding LEAPS for at least a year and a day are taxed at long-term capital-gains rates when the securities are held in a taxable account. Holding them in a retirement account defers taxes entirely -- a nice bonus if you've had a big winner that needs cashing out before the contract expires.
Tim has seen this process at work, cashing in a 10-bagger in Netflix LEAPS held in his SEP-IRA. Now, he's looking at Pandora Media (NYSE:P) LEAPS as a potential new buy, figuring that the company -- whose business depends on helping listeners discover new music -- occupies a defensible niche between single-track and album stores such as iTunes and Amazon.com and playlist organizers such as Spotify.
Buying 2016 LEAPS at a $30 strike would cost roughly $12.50 apiece. Thus, were Pandora to rise to, say, $60 on or before January 2016, Tim says he'd be sitting on at least a double. If he's right, holding in the IRA would allow Tim to realize the gains at any time without kicking off a taxable event.
Now it's your turn to weigh in. What's your strategy for cashing in on LEAPS? Do you use them in your retirement account? A taxable account? Please watch the video to get Tim's full take and then leave a comment to let us know whether you would buy, sell, or short Pandora stock at current prices.
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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Netflix at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.
The Motley Fool recommends Pandora Media. It recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.