Invest in Kraft Prudently with LEAPS

Kraft Foods Inc. [[KFT]] has strong fundamentals, excellent leadership, impressive stockholders and one of the best brand portfolios in the world. Despite these facts, the stock continues to trade near its 52-week lows as investors continue to sell regardless of intrinsic value. So, how can long-term investors build a strong position without losing out on any upside?

The first thing investors should look for is value with a catalyst. Kraft shares are trading lower despite a strong, recession-resistant brand portfolio and a healthy balance sheet. Meanwhile, lower commodity prices and an increasing move towards cooking at home could provide the catalyst needed to help boost earnings and the stock’s price. So, how can investors take a position without much capital?

Long-term options called LEAPS may be a prudent way for long-term investors to get involved in Kraft. Currently, the $25 January 2011 LEAPS calls are trading for $5.24 per contract with some 482 contracts open. This means that investors can purchase the rights to 100 shares anytime between now and January 21, 2011 for just $524 right now. The breakeven point would then be $30.24 per share.

The downside is that long-term options do not offer the strong dividend yield seen right now. However, LEAPS investors can treat their long-term options as a stock substitute and write shorter term call options against the position to collect premiums in a covered call. The risk is that they will be forced to sell earlier than expected, but it does provide some income in addition to capital gains.

See “Using LEAPS as a Stock Substitute” and “A Better Covered Call Alternative” for a more in-depth look at these strategies as well as our Tools & Products section for more ways to profit using LEAPS.