But the constant in each of the strategies is that they have all been relatively short-term trade set ups designed to work within days, with options that expire in about 45 days. The mindset has been get in, get out and turn your profits pretty quickly — typically, the more efficiently you can use your capital, the better. But I recognize that a lot of you come from a longer-term, buy-and-hold background. And I understand that this shorter-term, options-based way of generating income can be a bit much to take in as quickly as one would like.
These are options that allow for a longer time frame until expiration; you can buy many LEAPS as far out as two years and eight months before expiration. They were created around and started out as only being available on stocks, but eventually became available on indexes and nowadays you can even find these on Exchange-Traded Funds ETFs. These are most often written, but not exclusively for January of whichever year up to two years out. LEAPS options are in truth no different than their shorter-term siblings in that they have an expiration date, they can be found for both calls and puts, and they can be exercised at a given strike price.
When buying LEAPS, I typically like to consider doing so on an underlying that shows a habit of sustaining substantial price moves over sustained periods of time.
NKE fits that bill, showing a nice year-to-date uptrend. If you wanted to buy short-term options the Theta would be quite large. You may make more money on the trade of the underlying, but from a pure return percentage on your money the option trade is usually better. That is a very nice gain, and I bet many a money manager would love to have that type of return.
Again, the money available to be made on the option trade is less than that on the stock scenario. The further out options expiration will have less of a delta move because there is so much more time left on them.
Shorter-term options have a bigger dollar-for-dollar move capability than the LEAP. One last thing to note: Those tools are designed to find trade ideas on underlying securities poised to make a calculated move within days.
LEAPS are a great way to participate in options trading, giving yourself a means to participate in prolonged price moves in a variety of securities at a reduced cost, thereby limiting risk.
They allow the leverage of options while also giving you a big of the buy-and-hold mindset you may be used to. Doing this they generate a weekly income.
How does this work? Is this something that we should even be thinking about? Great article, in your articles do you spend time giving monthly stock suggestions? Dennis, what you are referring to is similar to a covered call, but in which the LEAP is substituted in place of the stock, so almost like a synthetic covered call.
What a trader like this would do is buy the LEAP, and sell 30 day call options against it. The goal is to take more theta in on the short term call than you pay out on the long term call. As long as the underlying stock stays sideways to up, the strategy actually works quite well for single digit monthly gains. The risk is much like a covered call and is to the downside. I have considered doing a monthly trade alert service, will let you know if that becomes a reality.
Thank you for very good article. Can you recommend for a good option scanner for short or long term at low cost or free? In your example Jan 16 95c there are 3 different prices. Why did you choose 8. Benny, those option quotes above were taken from my website TomsOptionTools.
These prices are based on the bid, mid, and ask. Buying the BID wont happen, its the price that you can sell for at the time. The MID price is one that is negotiable, and the higher the volume around the contracts, the more likely you can negotiate the price. The ASK is the highest price at that time, the one that you will most likely get. I used it in this example as a way of measuring the different time periods.
Does this mean that my stop losses will also be smaller because the delta on deep ITM leaps will be less? I am assuming since delta is 0. Am I getting this right? Or is something fundamental missing? Say, I am at 0. Email will not be published Required.
View this page online: Click here for this special report. Take a look at the chart below on Nike Inc. Now, take a lookJan16 95 Call: LEAPS give you a way to participate in prolonged price moves on the underlying at a reduced cost and lower risk.
Theta or Time Decay is less dramatic, meaning the option will not lose value as fast a shorter-term option will. A better ROI, meaning more bang for your buck, which is usually the case with any option trade when it works. For call options, delta values range from 0 to 1. So a long call option with a delta of 0. The long-term nature of LEAPS gives owners the advantage of long-term price moves — almost like owning the stock, but much, much cheaper and with lower risk.
Good Trading, Tom Gentile. October 29, at 1: October 29, at 2: October 29, at November 1, at 3: November 2, at November 3, at May 19, at 2: July 15, at 9:More...