The stock market notched new all-time highs this week with all the major indexes participating. And interestingly, money appears to be rotating into formerly unloved cyclical stocks and sectors, including Ford (F) which attracted a large LEAP call buy. Here is that trade, followed by my analysis, and a bit about what a LEAP option is:
Buyer of 150,000 Ford (F) January 10, 2022 Calls (exp. 1/21/2022) for $1.32 – Stock at 9.30 (rolled from January 10 calls exp. 2021)
The reason this trade caught my attention is both the number of contracts purchased (150,000) as well as the premium at risk ($19.8 million), and the expiration cycle chosen.
LEAPs options (or Long-term Equity AnticiPation securities) are just like ordinary options with one important difference, the length of time until expiration.
LEAPs can have expirations as long as one or even two years, sometimes more. As such, LEAPs suffer from much less time decay, meaning they are less volatile and trade more like stocks.
Institutions often use LEAPs as a stock substitute. Rather than tying up $139.5 million to buy 15 million shares of Ford outright, this buyer invests just a fraction of that amount ($19.8 million).
And while the financial outlay is dramatically less, the trader still controls the equivalent of 15 million shares.
This trade in F, and similar LEAP buys in Airlines or Hotels, is a great way to get long term exposure to a turnaround in stocks/sectors that have been unloved, but may be coming to life.