S. Wade Hansen

Use LEAPS to Avoid Value Traps

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Stock prices start looking more and more attractive the lower they go. It's like they are going on sale when their prices go down, and we are all suckers for a good sale.

In the investment world, we call these sale-priced stocks "value stocks" because they look like they are such a good value. However, sometimes they don't turn out to be such a good value after all.

All too often, we find stocks that look like a good value that lure us in and then continue to move lower and lower and lower. This is called the "value trap." These stocks may look like they are a good value today, but they can always look like an even better value tomorrow if they continues to move lower.

So, how can you tell if a value stock is really just a value trap?

Unfortunately, the answer is there is no way of knowing ahead of time.

You can certainly conduct a thorough fundamental analysis and assess the momentum of the overall stock market, but you can never know for sure. Investing always involves risk.

With that being said, there is a way you can mitigate the risks you face when trading value stocks. You can buy LEAPS calls on them. (See how this works in the Avoiding Value Traps with LEAPS video.)

LEAPS is an acronym for Long-term Equity Anticipation Security -- in other words, a long-term option. LEAPS are often considered an alternative to stock ownership due to their long-term nature. LEAPS all have the following characteristics:

• LEAPS always expire in January
• LEAPS are American-style options
• LEAPS can have expiration dates as far out as 2 years 8 months in the future
• LEAPS enjoy a slow rate of time decay