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In June of 2006, I opened a position that would double in three months.

No, I wasn't investing in wild penny stocks. There were no (ahem) "emerging economies" or sophisticated trading platforms involved, and there were no shady stock promoters to pay off before I could collect my profits. My secret? LEAPs, an acronym for long-term equity anticipation securities.

Or, in simpler terms: long-term call options.

Why your portfolio should take a LEAP of faith
I'll have more in a minute on how LEAPS led to a 120% gain in a quarter. First, let's talk about what LEAPs are. They're options that combine an intrinsic value with a time value. Motley Fool Options co-advisor Jim Gillies does an excellent job of explaining this concept in detail; please read it if you're thinking of trying options as an investment alternative.

What makes LEAPs more interesting than your average call option is their above-average time value. Instead of expiring in a month or a quarter, LEAPs give the patient investor more than a year to wait for catalysts to unlock value.

"Two and a half years is often enough time for many just plain cheap stocks either to be discovered or to regain popularity," writes Joel Greenblatt in You Can Be a Stock Market Genius.

Fortunately, I didn't need two and a half years. Three months was more than sufficient.

Steve Jobs made me rich
Interestingly, I wasn't buying a super-cheap stock. Apple (Nasdaq: AAPL  ) traded at a hefty multiple to earnings in June of 2006, more than I wanted to pay. But I loved the business. Also, at roughly $56 a stub, I suspected that a brutal summer downturn had led Wall Street to sharply underestimate the long-term implications of Apple's budding partnership with Intel (Nasdaq: INTC  ) .

What I needed was a way to compensate for the risks involved with holding a stock that boasted a premium valuation. LEAPs offered the answer. For $8 per share in the contract, I purchased LEAPs with a strike price of $70.

If that seems crazy, it sort of was. The intrinsic value of the option was zero. To break even, the stock would have to be trading for at least $78 at the time of expiration -- the $70 stock price plus my $8-per-share time-value premium. I was counting on having shares of Apple rise by at least 40% in 18 months -- not exactly a sure thing.

So why did I do it? I set the odds at 50-50 that Apple could gain at least a point of market share from PC peers by selling Windows-compatible Macs. I also suspected that, if I was right, the market would reward Apple by pushing its shares close to $100 apiece, at which point I'd own a LEAP worth at least $30 in intrinsic value, a near four-bagger. The math favored my bet. (A minimum 3.75-to-1 return versus a 1-in-2 chance of a complete loss.)

Gaming investors might recognize this math. Las Vegas Sands (NYSE: LVS  ) , Melco Crown Entertainment, and their peers profit by exploiting the mathematical edges built into their casino games. It's usually enough to service billions in construction debt. My edge was less certain, but I liked my chances to profit.

When I sold the LEAPs at $17.72 apiece -- more than double my purchase price of $8 -- on Oct. 16, 2006, shares of Apple closed at $75.40, above my strike price yet with plenty of time value still remaining. I sold because a scandal over employee stock-options pricing was obscuring the risks involved with holding a leveraged position in Apple.

Eric Schm ... I mean, I made myself poor
For as many stories like this one, there are more stories of investors who lose big with LEAPs and options in general. I lost big on 2010 LEAPs in Google (Nasdaq: GOOG  ) .

I bought in July of 2008 at a strike price of $450 a share -- well below what the stock was trading for at the time -- but without first identifying any short-term catalysts that would lead the shares higher. I sold in November 2009, realizing a 30% loss.

In hindsight, I shouldn't be surprised. Catalysts often precede returns. Sirius XM Radio (Nasdaq: SIRI  ) has rebounded nicely since stabilizing its balance sheet. A 2.0 version of the service, built in part on the Android OS, could help further juice returns.

Qlik Technologies (Nasdaq: QLIK  ) has rallied impressively on the strength of mainstream adoption of business-intelligence technology that for years had remained trapped in the executive suite. More than 19,000 now use its QlikView software, up from 14,000 a year ago.

Catalysts matter, and I've done well when I've paid attention to them. For example, when I deduced that the real value of Marvel's studio business would become clear to the Street after the release of 2008's Iron Man, I bought LEAPs to accompany my core position in the shares. Each purchase was a winner.

A final few words of Foolish advice
LEAPs are for neither the faint of heart nor the inattentive. It takes serious study to identify and then handicap catalysts. Yet I've been a net winner with these tools, and Greenblatt -- a master value investor if ever there was one -- endorses them for special situations.

Plus, there will always be opportunities to profit with LEAPs. Apple looks like it's giving investors yet another interesting opportunity. The Mac maker has a history of blowing away analyst projections yet continues to be valued below the Street's long-term consensus profit estimate. My own math puts Apple at $600 a share within three years. Why not take a look at the LEAPs? January 2013 calls with a $400 strike price trade for just $27 a share as of this writing. If I'm right and the stock rises to, say, $500 by that time, today's investors would be sitting on a three-bagger.

Of course, there are many options when it comes to options, including several lower-risk strategies worth employing. Care to learn more? Enter your email address in the box below to find out about our Motley Fool Options service.

The original version of this article first appeared on Aug. 17, 2009. It has been updated.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, and Qlik Technologies at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Google, Apple, and Qlik Technologies. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Melco Crown Entertainment, Apple, Qlik Technologies, Google, and Intel, as well as creating a bull call spread position in Apple and a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2011, at 10:42 PM, Billiardman wrote:

    When ever I hear or read of stories like this, all I can think of is, this is a guy with champaigne taste and a beer budget. You can call it a strategy. I call it simply gambling. Stop trying to find a shortcut to getting rich. If you think a company is going to do well, just buy the stock. It's not rocket science.

  • Report this Comment On June 18, 2011, at 12:11 AM, pryan37bb wrote:

    I don't think there's anything wrong with using call options as stock replacement, especially in growth stocks, and even more especially in stocks that are $100+. If you wanted to buy 100 shares of Apple, you'd need to put up $32,000, but calls give you control over a similar amount of stock for a lot less. If he were a retiree, I'd join you in chiding him for taking on too much risk, but otherwise a little leverage can be an invaluable addition to a portfolio.

  • Report this Comment On June 18, 2011, at 1:46 PM, Billiardman wrote:

    Options do not and should not replace stocks. When used by themselve it's not investing. It's gambling. It enables someone to make a larger play then they could otherwise afford. Because they are using leverage. And by definition takng much greater risk. It makes no difference what the cost of a share of stock it. It's about the percentage of return on investment.

    By your remark, you've stated you would use options because you can't afford to purchase the shares. IE: Champaigne taste with a beer budget.

    Nuff said.

  • Report this Comment On June 18, 2011, at 5:53 PM, pryan37bb wrote:

    Gimme a break, I didn't mean that people only use options because they can't afford the real thing, and I didn't mean to suggest that someone should construct their portfolio with nothing but options, that would be downright dangerous. "Stock replacement" is just a phrase that means using derivatives to try to mimic the returns of the underlying with less money on the table:

    It doesn't mean use options exclusively instead of stocks, that'd just be stupid. Personally, my own portfolio is almost entirely high-yielding stocks and no options - yet. But soon I'll be looking into using options to accelerate my returns while defining my risk. And it's not necessarily gambling; if you buy a call that's in-the-money; there's less of a chance it'll expire worthless and instead acts more like a stock than an option. The gambling you refer to is when people buy out-of-the-money options cheap and hope they'll expire in-the-money, doubling their investment. Some people can do this, but most people lose money, trying to replicate the story of the guy who bought $65,000 worth of OTM puts in RIMM the day before expiration that would expire worthless if the stock didn't tank 10% the next day on the earnings news. The stock fell like 20%, and the guy made eight times his money. Someone who tries to make bets like that consistently is gambling; someone who constructs a portfolio of only options, instead of a healthy allocation of, say, 10-20% of the portfolio, is gambling; someone who shorts options without the capital or underlying to back it up is gambling. But you CAN use options without gambling, or at least without more gambling than is already inherent in stock ownership, and while a portfolio shouldn't be entirely leveraged (unless you wouldn't mind losing all your money), a SMALL amount can help to diversify without risking much money.

  • Report this Comment On June 25, 2011, at 4:17 AM, kmacattack wrote:

    I've done very well with options over the years, but all my holdings are n my IRA, and you can't write "naked" options in an IRA, so I must either own enough shares to cover the options, or have cash available to cover them if the market moves against my options. I'v made a lot of money in the last year sellin puts on Sirius (SIRI) when the stock pulls back, and have been able to buy back the options at a cheap price when the stock shoots up quickly, or in the case of my last put written, the option expired with the stock well above the strike price. I intend on owning SIRI long term, so I never sell call options. I've done well a couple of times selling calls on BRK-b (Berkshire Hathaway b shares), and TATA motors (TTM). I lost the TATA stock when I was called away, but made a nice profit, and it's down about $7 now, so I may buy the stock back and sell a put. I'm near retirement age, but have only been "burned" one time on an option on CLNE (Clean Energy) and I bought the stock instead of giving up all the premium I paid for a total loss. If congress will stop playing politics and do the right thing and pass the energy bill, this stock will be a 3 bagger in a year or so. It's cheap right now, I may buy more next week, then immediately sell a put.

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