Pelosi bought Broadcom. Why di he buy options instead of stocks?

#options Pelosi, the former Speaker of the U.S. House of Representatives known as the "Stock God of Capitol Hill", has been making frequent moves recently. According to the transaction records of members of Congress, Pelosi purchased call options on Broadcom and 10,000 shares of Nvidia, and sold some Tesla and VISA stocks.

https://www.quiverquant.com/congresstrading/politician/Nancy%20Pelosi-P000197

Pelosi Buys Long Call Options

According to records, on June 24, Pelosi purchased 20 Broadcom call options with an exercise price of $800 and an expiration date of June 20, 2025. The total value of the transaction is estimated to be between $1,000,001 and $5,000,000. Two days later, on the 26th, Pelosi made another important investment, purchasing 10,000 shares of Nvidia. This transaction is similar to the Broadcom purchase and is valued at between $1,000,001 and $5,000,000.

Nvidia and Broadcom have both experienced big gains this year, with stock prices rising 154% and 52%, respectively, mainly benefiting from the surge in AI-related spending.

Among them, the Nvidia purchase is particularly noteworthy because Pelosi has a long and notable trading history with Nvidia, and she made a very successful option transaction in late 2023. As early as early 2024, Pelosi's investment income from Nvidia was reported to have exceeded her annual salary as a member of Congress.

As for Broadcom's call options, with an exercise price of $800, there is also a lot of potential upside, as Wall Street generally believes that Broadcom's stock will rise at least another 11% in the next 12 months.

What Pelosi bought here is actually the LEAPS in the option.

What are LEAPS?

LEAPs are long-term equity anticipation securities, which refer to options with an expiration date of more than 1 year. They are functionally the same as most other listed options, except that they have a longer expiration date. Aside from the later expiration date, LEAPS are no different from short-term options. The longer the expiration date, the more likely long-term investors are to participate in long-term price fluctuations.

Pelosi LEAPS Case

On June 24, Pelosi purchased 20 Broadcom call options with an exercise price of $800 and an expiration date of June 20, 2025. Looking back at the option transactions on that day, the transaction price was $836.93.

The actual cost of Pelosi holding Broadcom is the option cost plus the exercise price of $800, which is $1,636.93. Currently, Broadcom's stock price has reached $1,729.22. If Pelosi exercises the option now, she can earn $9,229×20=$184,580. Compared with the total investment of $1,673,860 at the beginning, Pelosi's current profit is 11%.

If derivatives are not used, and cash is used, it will cost $3,184,420 to buy 2,000 shares of Broadcom based on the closing price of 1,592.21 on June 24.

After Pelosi applied LEAPS, she achieved almost the same effect with only 52.56% of the money needed to buy stocks.

LEAPS helps option investors save 52.56% of the amount of funds and obtain almost the same returns when the judgment is correct, greatly improving the utilization rate and rate of return of funds.

However, if Broadcom's stock price remains volatile or falls before the expiration date, stock investors will not lose their funds, but option investors will lose all their funds. This is one of the defects of the Leap strategy. If the market judgment is wrong, investors will lose all their funds.

LEAP call options enable investors to build a long-term investment portfolio of stocks or index ETFs, thereby controlling larger investments with less capital. For leveraged strategies such as Leap, large leveraged investments are likely to result in significant losses, so investors need to be cautious.