LEAPS: Learn This Easiest Options Strategy FIRST!
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What is LEAPS options trading?
LEAPS means Long-Term Equity Anticipation Securities Call . What is a Call? Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock or bond? Now, what is LEAPS Call? LEAPS call options to allow investors to benefit from potential rises in a specific stock while using less capital than purchasing shares with cash upfront. In other words, the cost of the premium for an option is lower than the cash needed to buy 100 shares outright. Similar to short-term call options, LEAPS calls allow investors to exercise their options by purchasing the shares of the underlying stock at the strike price. Options with more than 9 months until expiration are considered LEAPS. They behave just like other options, so don’t let the term confuse you. It simply means that they have a long “shelf-life”.
When should you use the LEAPs options strategy? When does it work?
It works when you want to invest long-term when the expiration date is far far from today. Just a quick explanation. One important difference between stocks and options is that stocks give you a small piece of ownership in a company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date – option expiration date. What is the option's expiration date? The day when the contract expired. Boom... If an option expires, nothing happens. No shares are assigned and the entire position expires worthless and disappears from the trader's account
When is it NOT the best idea to use the LEAP strategy?
First of all, It's important to remember that there are always two sides to every option transaction: a buyer and a seller. In other words, for every option purchased, there's always someone else selling it. Not every stock can be used for LEAP strategy…. APPLE, SPY, TESLA are big and popular companies and the volume of contracts is very high. But LEAPS options trading strategy doesn’t work very well if you want to deal with mid-size or small unpopular companies,
Also in the case of LEAPS, you will have some other cons: Costlier premium, Long time frame ties up the investment dollars, Prices are more sensitive to changes in volatility and interest rates.
Probably if you are interested in options, you have already heard such phrases like in-the-money and out-of-the-money. It is option profitability. When the strike price of a call option is above the current price of the stock, the call is not profitable or out-of-the-money. In other words, an investor is not going to buy a stock at a higher price (the strike) than the current market price of the stock. When the call option strike price is below the stock's price, it's considered in-the-money since the investor can buy the stock for a lower price than in the current market.
As a starting point, consider a LEAPS call that is at least 20% of the stock price in-the-money. (For example, if the underlying stock costs $100, buy a call with a strike price of $80 or lower.) However, for particularly volatile stocks, you may need to go deeper in-the-money to get the delta you're looking for.
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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partner websites. The video is accurate as of the posting date but may not be accurate in the future.