Learn to trade LEAPS Options for beginners - Options Robinhood Tutorial!
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In todays video we are talking about LEAPS and how you can make money and profit investing using options.
What are LEAPS - Well, this is easy - LEAPS are options that have an expiration date of 1 year or more. LEAPS stand for Long-Term Equity Anticipation Securities. Now the only difference between LEAPS and shorter term options is just the expiration date - that’s it.
Why buy leaps?
- The first benefit in using LEAPS is the same benefit you would have when using options in general - and that’s that you’ll leverage your returns and make a lot more profit than you would just buying and holding stock, especially when buying ATM or OOTM LEAPS. For example, when buying and holding stock and that stock goes up by 50%, then you would have a return of 50% but when buying options, if the stock rises by 50% your returns are leveraged so you can see returns of 100%, 300% even 1000% which I’ve had quite a few times myself.
- The second benefit is that you can actually use LEAPS to substitute buying 100 shares of a company and mirror the exact returns you would get when buying stock but with much less money - So instead of buying 100 shares, you will buy certain ITM LEAPS and pay a premium to control the 100 shares - and that premium paid will cost you less money than buying 100 shares of a company that you might not be able to afford. Now this is very important especially when you have a smaller account, you can use less money to control 100 shares of a company, and use that extra money you save to invest elsewhere and make even more profit.
- Now with greater reward comes of course greater risk - and what’s the biggest risk when buying options? Well, the risk of losing 100% of your premium if your option expires worthless. That means, if I buy an option and pay $1,000 for that option, and my option doesn’t reach my strike price, that option will expire worthless and I’ll lose the full $1,000. So yes, buying and holding shares of your favorite company might be boring but its for the most part a safer investment than buying options because of the time sensitivity of options and the fact that you need the stock to get to a certain amount. Now buying LEAPS take away some of that time sensitive risk - and buying ITM options takes away some of the risk of your option expiring worthless but nonetheless, nothing is risk free so as long as you understand that you should be good to go! Ok, lets go through the strategies.
When you buy an option contract you are paying a premium for that option. The option gives the buyer - thats you - the right to buy or sell 100 shares of the underlying company at the strike price on or before the expiration date. So when I buy a call option I am making a bet that the stocks price will reach a certain price or stay above a certain price by the expiration date. When you buy a put you are making a bet that the stock will go down to a certain amount and stay below the strike price by expiration. Now when the expiration date comes the option will either be in-the-money or out-of-the-money.
Now that we understand the idea of buying options in its most simplistic form, I want to introduce 2 elements to the trade that will determine how risky your trade is and how much profit you can make. These 2 elements are the expiration date, and whether you buy options that are ITM or OOTM to begin with. See you have the option (no pun intended) to buy options that expire next week if you want. That, as some of you may know, is extremely risky and you’ll probably lose all your money that way. You can buy options with a few months to expiration - this is a bit better, but again, you are risking your entire trade on price action of just a few months. Now what I suggest, and what I do myself is buy LEAPS - options with more than 1 year until expiration because I want to take advantage of the Macro trend of the market over a long period of time and let the overall upward trajectory of the stock market make me money. Now the question is, do you buy ITM or OOTM options when it comes to leaps? (Watch Video for The Secret)
LIQUIDITY! You need to make sure that the LEAPS you buy have liquidity - enough trading activity on it so you can sell your positions. (Watch Video)
I am not a financial advisor - none of the above video is meant to be taken as investment advice. I am just showcasing MY own strategy and my investments should not be tried and duplicated based solely off the information in this video for risk of losing money.
