Look Before You Buy LEAPS

Q

What are LEAPS? — H.B., Pueblo, Colorado

A

Long Term Equity Anticipation Securities (LEAPS) are long-term options. Standard options let you purchase the right to buy (via “call” options) or sell (via “put” options) a fixed number of shares of a stock at a fixed price within a fixed time period, typically a few months. LEAPS work the same way, but expire after more than a year.

For example, if you think that PieMart (ticker: GOBBL), trading at $50 today, will soon be at $70, you might buy call options for $6 per share that let you buy the shares at $55. That will ultimately cost you $61 per share ($55 plus $6), netting you a $9-per-share profit — but only if the stock hits your target before the expiration date.

LEAPS, with their longer time frames, generally cost more than shorter-term options, but they can be more attractive as they give the underlying stock more time to move.

Options are not for beginning investors, and many experienced investors steer clear, too. Learn more at investopedia.com/university/options and fool.com/investing/options/ options-a-foolish-introduction.aspx.

Q

Are companies with lots of cash and no debt the best ones to invest in? — G.D., online

A

Lots of cash does allow a company to take advantage of opportunities that arise, but too much cash can be unproductive and, arguably, even wasteful.

Many successful companies will often keep small cash balances. They spend their cash for purposes such as paying dividends, expanding their businesses and acquiring other companies. If they suddenly need cash, they draw on their lines of credit.

Meanwhile, a manageable amount of debt isn’t necessarily bad. Indeed, if a company borrowed at a low rate and made great use of that money, it’s an effective strategy.

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