BUY the Interactive Brokers (IBKR) December 2023 $80-$85 at-the-money vertical Bull Call debit spread LEAPS at $2.50 or best

Opening Trade

3-28-2023

expiration date: December 15, 2023

Number of Contracts = 1 contract

I just learned from the founder Thomas Peterffy that cash flows into Interactive Brokers have rocketed by 37%, from $4 billion a month to $5.5 billion. The market is essentially treating (IBKR) as a large “too big to fail” bank.

The brokerage sector has been beaten like the proverbial red-headed stepchild this year, with plunging stock market prices and volumes. However, it should be at the core of any long-term LEAPS portfolio.

Traders seem to have put brokerages and regional banks all into the same basket. They are dead wrong.

The best time to pick up this position will be during a market meltdown day and the Volatility Index is over $30.

If you are looking for a lottery ticket, then here is a lottery ticket.

While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is 20:1. That is the probability that Interactive Brokers shares will rise by 3.66% over the next nine months.

(IBKR) is one of the top online brokers, with a market capitalization of $34.2 billion. That has far and away one of the most sophisticated and conservative risk control procedures out there. If you don’t believe me, just try and sell a naked put short.

The regional banking crisis has pulled forward any recession and therefore the recovery. The Fed raised interest rates by 25 basis last week because it was already in the mail. 

After that, there will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.

And here is the sweet spot. Fears of a recession have knocked $16, or 17.8% off the recent $90 high in (IBKR) shares this year.

To learn more about the company please visit their website at https://www.interactivebrokers.com/  

I am therefore buying the Interactive Brokers (IBKR) December 2023 $80-$85 at-the-money vertical Bull Call debit spread LEAPS at $2.50 or best

Don’t pay more than $3.00 or you’ll be chasing on a risk/reward basis.

The December 2023 is the longest maturity that trades options.

Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.

Let’s say the Interactive Brokers (IBKR) December 2023 $80-$85 at-the-money vertical Bull Call debit spread LEAPS are showing a bid/offer spread of $2.00-$3.00, which is typical. Enter an order for one contract at $2.10, another for $2.20, another for $2.30 and so on.

Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.

A lot of people ask me about the appropriate size. Remember, if this stock does NOT rise by 3.66% in 9 months, the value of your investment goes to zero.

The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work you double your money, and of only three of ten work you triple your money.

There is another way to cash in. Let’s say we get half of your double in the next three months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. Then you can decide whether to keep the fivefold return or go for the full ten bagger. It’s a nice problem to have.

Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.

Look at the math below and you will see that a 3.66% rise in (IBKR) shares will generate a 100% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 20:1 across the $80-$85 space.

Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.

This is a bet that Interactive Brokers will not fall below $85  by the December 15, 2023 options expiration in 9 months.

Here are the specific trades you need to execute this position:

Buy 1 December 2023 (IBKR) $80 calls at……...…….………$12.00

Sell short 1 December 2023 (IBKR) $85 calls at………………$9.50

Net Cost:………………………….………..……...............…….….....$2.50

Potential Profit: $5.00 - $2.50 = $2.50

(1 X 100 X $2.50) = $250 or 100% in 9 months.

 

 

 

 

To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.

If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.