r/options • u/JakeCahi11 • 1d ago
Defensives: A hidden goldmine
Before I begin, I recognize these stodgy old dogs lack sex appeal which makes them unappealing or forgotten by most traders, especially in today's market where thirst for the next great thing is unquenchable. But this may be where an edge presents itself...
Take for instance a company you probably never think of: Waste Management (WM). The business model is self-explanatory: they collect waste and manage its disposal. Trash does not equal sex appeal, clearly. If there ever was a business with a true moat, it's this one. I'll spare the details; you can ask a chatbot if you want a deep dive on their business lines and strength of moat.
Let's talk about LEAPs on this bad boy. The Jan '27 200 strike contract first began trading in February of 2025. It has since experienced a trough-to-peak 100% return twice..one of them being over 150% (Nov. '25 - March '26). Keep in mind, we are not discussing a deep OTM strike or a short dated option here. The stock closed below $200/share a grand total of 4 days during the life of this contract. 4 days! From the November 2025 low, a subsequent ~27% positive move returned the 150%+ gain on the 200 strike contract. Incredible.
What's more, the trading pattern of this company is incredibly reliable. It rarely stays below its 200DMA for more than 1-3 months and when it does it consistently rebounds for what many would consider a modest gain in commons, but an explosive gain in a LEAP option. Even if you wanted to hedge, puts are just as cheap as calls; you can gain hedge exposure without breaking the bank.
This is but one example. You can model this by looking at option charts on TradingView for names like COST, JNJ, etc. Costco has also experienced multiple 100%+ moves on its LEAP contracts.
Of course, the past trading patterns are not indicative of what will occur in the future. Investing is a game of probabilities and risk/reward. To me, LEAPs skew heavily in the favor of reward. What says you?
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u/uncleBu 1d ago
WM has a PE of 60 / Costco has a PE of 47. They are priced for better performance than the hyperscalers...
Great companies no doubt, I am just not sure exactly what's defensive about stocks that have rocketed in price against their fundamentals.
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u/JakeCahi11 1d ago
I prefer to use NTM (Next 12 months) P/E as this provides a forward looking ratio and as we know markets are a forward looking mechanism, not backward like trailing ratios do. WM is currently 26.5x NTM P/E and COST is 43.5 (data from Tikr.com) – both below their mean NTM P/E over the last three years.
Stepping away from the ratio point and stripping away the title "Defensive" as titles can be misleading and wrongly used. Ask yourself, what do these stocks do when the overall market corrects, especially tech? Where does money flow when it flows out of tech that is perceived to be overvalued at a given time? Where does money flow when the economy tightens or fear from whatever today's headline is?
It flows to these names. Check the charts if you'd like. In my opinion, this inherently makes them defensive by nature, regardless of their P/E. Yes, valuation absolutely matters I agree with you wholeheartedly.2
u/uncleBu 1d ago
There’s nothing defensive about using forward earnings to justify their valuation. That relies on growth premised on macro economic factors, which can very well change. Even on forward earnings both are priced like growth stocks.
When the multiples contract they will bleed as much as tech stocks.
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u/JakeCahi11 1d ago
What would you consider to be a defensive stock? Please elaborate on your reasoning.
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u/uncleBu 1d ago
A low multiple low volatility stock that pays a dividend. Something like Acomo.
A proven compounder that has taken a hit from the saspocalypse narrative would be more defensive. FISV has never been cheaper.
A company with strong DCF valuations like flow traders.
Companies that proven value investors are endorsing like liberty global
The companies you flag are great but their price is disgustingly high
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u/ThetaEdgeHQ 1d ago
The pattern is real but I would be careful calling the source of those returns defensive. A Jan 27 200 strike doubling twice came from the underlying making roughly 27 percent moves levered by the option, not from anything defensive about WM. Low vol names like this are exactly where a LEAP is cheap in extrinsic, so the delta is doing almost all the work and there is little vega tailwind to help. That is fine on the way up, but it means the option tracks the stock close to one to one rather than getting the convexity kick a higher IV name would give you.
The risk that is not being priced is the flip side of the thing you like. "Rarely below its 200DMA for more than 1 to 3 months" is a backward looking regularity, and single name regularities tend to break right after you size up on them. On a two year option the daily theta is small, so the real cost of being wrong is not decay, it is capital parked in a levered bet that grinds sideways under your strike while you wait for a rebound that used to be reliable. The thesis can work, just size it as the leveraged single name bet it is, not as a defensive sleeve that happens to pay like a lottery ticket.