Just as every cloud has a silver lining, every stock market crash offers generational opportunities.

The September and October 2022 are now behind us, for the past 100 years, the two worst trading months of the year. That means they are also the best months for entering spectacular trades with LEAPS.

What are LEAPS you make ask?

This is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets, especially in 2022.

LEAPS, or Long Term Equity Anticipation Securities, is just a fancy name for a stock option spread with a maturity of more than one year.

You execute orders for these securities on your options online trading platform, pay options commissions, and endure option-like volatility.

Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years’ worth of stock gains for a fraction of the price.

While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well-defined. But you get 10X or more exposure to the stock. They are kind of like synthetic futures on individual stocks.

And there are many companies in the market where LEAPS are a very good idea, especially on those gut-wrenching 1,000-point down days.

Interested?

Currently, LEAPS are listed all the way out until June 2025.

However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.

These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.

Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.

Like all options contracts, a LEAPS gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.

LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).

To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.

If a LEAPS expires "out-of-the-money" – when exercising, you can lose all the money that was spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof and your money is gone.

LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.

One of my most profitable trades in 2021 was the (TLT) December 2022 $$150-$155 vertical bear put LEAPS, which generated a 100% profit for everyone who got into it. Those who bought the more aggressive (TLT) December 2022 $$140-$145 vertical bear put LEAPS made 200%.

I see you’re still interested. For example, the highly popular ProShares 2X Ultra Technology ETF (ROM) only offers maturities out only six months so it is not possible to do a proper LEAPS. No one is willing to take the risk on the other side of this highly volatile security.

Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.

 

Note that a LEAPS owner does not vote proxies or receive dividends, because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.

Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.

They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.

And for a moderate increase in risk, they present outsized profit opportunities.

For the right investor they are the ideal instrument.

Let me go through some examples to show you their inner beauty.

By now, you should all know what vertical bull call spreads are. If you don’t, then please click there link for a quickie video tutorial at  
https://www.madhedgefundtrader.com/ltt-vbcs/
(you must be logged in to your account).

Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.

Now let’s say that instead buying a spread four months out, you went for the full year and three months, to June 2019.

That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.

So, by holding a 15 month to expiration position for only a month you get to collect 86.67% of the maximum potential profit of the position.

So, now you know why we leap into LEAPS.

When the melt down comes, and that could be as soon as next week, use this strategy to jump into longer term positions in the names we have been recommending and you should be able to retire early.

Now you know why I like LEAPS so much. Please play around with the names and the numbers and I’m sure you will find something you like. But remember one thing. LEAPS are only a trade to consider at long time market bottoms, not tops!

They are also the perfect positions to own if you believe we have just entered a second Roaring Twenties and a second American Golden Age, as I do.

 

 

Time to Leap Into LEAPS

OK, let me take my victory lap.

Since I sent out this report two months ago, Tesla shares have exploded upward by a breathtaking 32,4% to $253, a new 2023 high.

And the best is yet to come!

Of course, we got an assist from several fronts. The Tesla Model Y became the world’s top-selling car in Q1, just edging out the Toyota Corolla. Then both Ford (F) and General Motors (GM) signed on to use Tesla’s national supercharger network, giving it an effective monopoly.

When I heard that the February 28 Tesla Investors Day in Austin, TX was boring, I was highly suspicious. I thought that might be a journalist’s snap judgment with a strong background in creative writing.

Engineers and scientists might have a different take, I thought. So, I listened to the entire 3 ½ hours and copied all the important charts.

What I heard was nothing less than earth-shaking, groundbreaking, and revolutionary, and won’t cost more than we would spend otherwise. All we have to do is spend more intelligently.

Elon Musk unveiled his Master Plan 3 and unleashed a cornucopia of new data which only an immense amount of research can produce. This will require all forms of transportation to be electric-powered within 20 years, except for interplanetary rockets.

As anyone who has been through an advanced physics course can tell you that internal combustion engines are woefully inefficient, converting only 25% of their energy into forward motion, and 20% if you include materials energy costs. But that was the best the 19^th century could do and it worked for 151 years (Nicolaus Otto built the first gasoline-powered internal combustion engine in Germany in 1872).

Electric motors in Teslas operate closer to a 50% efficiency rating, cutting energy demand by half right there.

To move the world to an all-electric economy will cost about $10 trillion, or about 10% of world GDP. Average that out at 0.5% per year and it will take about 20 years. Adding up car and storage batteries, that means 24 terawatts worth of batteries will need to be manufactured. There are one trillion watts per terawatt.

By comparison, the sun produces 1 gigawatt of energy per square kilometer per day, or 509,600 terawatts. That means an all-electric economy dependent on batteries equivalent to less than 0.1% of the sun’s daily output. In other words, it’s miniscule.

In fact, the world is already decarbonizing far faster than people realize.

There are currently 2 billion cars and trucks in the world, 85 million a year are manufactured, and some 16 million in the US. Global EV production came to 10.6 million vehicles in 2022, an increase of 22%.

Some 60% of new electricity generation installed last year came from alternatives. That’s because in terms of power output alternatives are 40% cheaper than oil, coal, or natural gas. That’s being generous as it does not include the health care costs of carbon-based energy, which make several hundred thousand people per year ill in the US alone (asthma, lung cancer, etc.).

This means that a heck of a lot of lithium is going to be needed. Soft, white lithium is number three on the period table (you’re talking to a chemist here), is a great oxidizer, and is anything but rare. What IS rare is the lack of environmental controls and cheap labor.

This is why the bulk of lithium is produced by China and South America where it literally sits on the surface. This is all easily scalable to meet future demand. In fact, moving to an alternative-based world uses far less mining than the existing conventional one.

The shortage is not in lithium supply but in lithium processing. The world’s largest lithium consumer should know. Musk recently announced they would move into lithium processing.

Home heating is another challenge. Existing heat pumps, which I have, do a great job heating in winter and cooling in summer in southern and western states where the weather is mild. These use only one third of the energy used to heat homes with oil and natural gas.  States facing subzero temperatures are another story. This problem can be solved with a fundamental redesign of the heat pump hardware.

Here was a big surprise for me. EV’s are not going to create an exponential demand for lithium. Once you get up to a total installed base of 40 million batteries, recycling becomes the primary sources of lithium as batteries age out. They can then be reprocessed into new batteries. This eventually caps lithium demand. Future cars will use far less silicon carbide, further reducing its demand by 75%, saving $1,000 a car.

Musk is dumping the traditional 12-volt lead acid battery all Teslas have now which accounts for 87% of all start failures. Instead, he is adding a second small lithium ion one and redesigning the electrics to take 48 volts. This means lighter weight cables can handle more power at less cost. Musk hope to force the entire auto industry to move to a 48-volt standard, which should have been done decades ago.

The world’s 4 million Teslas now drive 123 million miles a day and represent the largest AI neural network on the planet. If a car in Florida makes a left turn, all the cars in the rest of the country learn from that experience.

Tesla now has 80,000 chargers in the US, including 40,000 superchargers, which can charge up 450 miles per hour and give you a full charge in 40 minutes. Tesla charged cars with 7 terawatts of power in 2022 and per kilowatt costs have dropped by 40%, with charge times down 30%. Tesla is well on its way to becoming the largest electric power utility in the United States.

Tesla’s current manufacturing capacity is 2 million cars a year across four factories (Fremont, CA, Austin, TX, Berlin, Germany, and Shanghai, China). While it took Tesla 12 years to make its first million vehicles, the 4^th million took only seven months. As of today, it is cheaper to own a Tesla than the world’s biggest selling car, the Toyota Corolla, given their total lifetime costs. Work out the cost of charging a Tesla and you are paying the equivalent of 25 cents a gallon for gasoline unless you are at my house, in which case it is free.

The Gigafactory in Sparks, NV, which mass produces lithium-ion battery packs, is currently being doubled in size. In Texas, Tesla is buying wind power from the grid and offering Tesla owners a flat rate for charging of $30 a month because the cost is so low.

There are great hopes for the Cybertruck, for which Tesla has 1.5 million orders, myself included. The final price for the three-motor version will be about $100,000, the same as for a model X. The Cybertruck will have a brand new third-generation platform on which all future Tesla models will be based. It will also include the 48-volt electrical design.

Tesla’s price cuts have been wildly successful, allowing it to gain market share at its competitors' expense. Tesla is really just passing on the recent collapse in commodity prices. So far in 2023, Lithium prices have fallen by 20% and copper by 15%. Tesla prices will continue to fall, especially when the new $25,000 Model 2 is brought to market in 2024. That will really decimate the competition.

Tesla has also taken the plunge into the insurance industry, charging drivers on their actual driving history, which they already collect. If you drive like a little old lady, it can run as little as $180 a month. If you drive like Mad Max, it’s more, but not as much as a conventional car insurance company.

Rates change monthly depending on your driving record. Parked in a garage gives you a perfect score of 90 and it drops from there. It’s all about reducing the total cost of a Tesla car. Not such a bad deal if you let their computer do all the driving.

What will Tesla disrupt next?

All in all, it was a breathtaking presentation, which Elon delivered coolly and calmly. It is with the greatest enthusiasm that I reiterate my $1,000 per share price target.

To watch the Tesla Investor Day in its entirety on YouTube, please click here.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader