How To Buy Stocks At 50% Off
How To Buy Stocks At 50% Off
Hello Smart Option Sellers! I've finally crawled out from under my rock and entered the social media age. I'm on Twitter! What does that mean? It means I will be posting some of my thoughts from time to time on items related to investing, the stock market and how to be a smarter options trader. If you are already a Twitter member, please go to the website and click on the blue Twitter "Follow" button that you'll see along the top header. This way you can read my tweets and have instant access to some of my other thoughts. And don't forget to "like" or "re-tweet" my posts. This helps increase the public's awareness of the great things we're doing at The Smart Option Seller. Don't worry, no one in the public will have access to any of our trading ideas, nor will I post any trades for free. Also, don't forget to read my new "Put-Selling Basics" guide. It's a great refresher for both experienced and new traders. It's totally free. You can find it on the website or just click here to read. And lastly, many of you are not taking advantage of our phone text alert messaging system. If you'd like to be notified on your mobile phone when a new alert is about to hit your email inbox, join our text alert system by typing in your first & last name and mobile number here: Buying Apple At Half Price While we wait for more put-selling opportunities to present themselves, I thought I'd change topics and talk about buying options. Many of you saw the power of buying cheap, speculative put options on Target last week and how fast the profits can add up. But today I want to broaden your horizons and discuss a way to buy any long-term stock you want for half the price. If you've read chapter 6 of my book, then you know what I'm talking about. If not, today's lesson should pique your interest. Currently, Apple Inc. (AAPL) trades at all-time highs of roughly $140 per share. If you were to buy 100 shares, it would cost you $14,000. But there's a way to control those same 100 shares for half the price, and still get all the same profit (and loss) movement as being a regular stockholder. Buying deep-in-the-money (DITM) call options is the answer. What's a DITM call option? It's a call option whose strike price is set way, way below the current price of the stock. For instance, the AAPL January 2018 $70 call option is priced at a fair value of $69.80 per contract. This $70 call option is DITM as its strike price is way, way below the current price of the stock. To be exact, it is $70 below the current $140 price tag of Apple. If you were to buy one (1) contract of the $70 call option, it would cost you $6,980 ($69.80 per option contract). That's a full $7,000 cheaper than it would cost to buy 100 shares outright. Not only is that a 50% reduction in your cash outlay, but it also reduces your risk in the trade by half, as well. And one of the best features about buying the call option instead of the stock - is that you will get point for point movement with the stock. How do I know? Because the call option has a 100% Delta. What's a 100% Delta? The delta is the Greek indicator that tells us how much movement an option will get in comparison to the movement of the stock. If you have a 100% Delta, then you will have an exact correlation with the stock's movement. If Apple jumps $5 per share to $145, the stockholders will gain $5 per share, but so will the $70 call option. It will move up to $74.80 per contract ($7,480), giving you a $5 per contract ($500) gain as well. On a return basis (ROI), the call option doubles your return. If you bought 100 shares at $140 and the price rallied $5, you would see a gain of 3.5% ($5/$140). But with the call option, you'd see a return of 7% ($5/$70). That's a better use of your funds. All options have a delta of varying sizes, depending on the strike price. Options that are DITM have deltas near 100. This is key to using the strategy successfully. Sure, you can buy very cheap options that cost just a few dollars, but their deltas are very small and you won't get the movement out of them. For instance, the Apple January 2018 $180 call option only costs $1.35 ($135) per contract, but its delta is a measly 11%. Call options with strike prices way, way above the current price of the stock are called "out-of-the-money" (OTM) and have very small deltas. You don't get much bang for your buck, as the option will move very little in comparison with the stock's movement. If Apple jumped the same $5 per share to $145, the $180 call option would only gain roughly $.55 to $1.90 per contract. If you are in it for the long haul, you want good movement from your options. That's why choosing options with high deltas are critical. If you are in it just for a very quick move (like the Target trade), then it's ok to buy the cheapie options. Delta information can be found within the option chain platform that most brokers have available. Check it before you buy your next option. Buying DITM call options is a very viable substitute for buying shares outright. What's not to love about shaving half of your risk and half of your cost? Plus, you're getting 100% correlation with the stock's movement and doubling your ROI. What are the drawbacks? Two things: 1. As an option holder, you don't get the stock dividends nor do you retain voting rights. Only stockholders get those benefits. So, it's up to you to decide what's more important. To me, the benefits of buying DITM outweigh the rest. 2. All options have an expiration date, so at some point, you'll need "roll" these options to the next long-term contract. Again, is that worth not doing the trade? Not for me. Lastly, and this is most important, in no way does this strategy suggest that using it will produce profits of any kind. First and foremost, you have to get the stock's direction right in order to make a profit. If you can't do that, then you will lose money no matter what strategy you choose. Bottomline, if you're thinking about buying shares of a stock, consider buying DITM call options instead. I hope everyone finds this little lesson enlightening, as I try to educate as well as help to make profits. For a more in depth look, you can always read the chapter in my book. That's all for today. You can always reach us here. Regards, Lee Let's Grab That Cash!
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