LEAPS are longer-term options. First, choose a stock. You should use exactly the same process you would use if purchasing the stock.
Now, you need to pick your strike price. A general rule of thumb to use while running this strategy is to look for a delta of. Remember, a delta of. The deeper in-the-money you go, the more expensive your option will be.
But the benefit is that it will also have a higher delta. And the higher your delta, the more your option will behave as a stock substitute. You must keep in mind that even long-term options have an expiration date.
If the stock shoots skyward the day after your option expires, it does you no good. Furthermore, as expiration approaches, options lose their value at an accelerating rate. So pick your time frame carefully. That makes this strategy a fine one for the longer-term investor. After all, we are treating this strategy as an investment, not pure speculation. You also need a pre-defined stop-loss if the price of your option s go down sharply. Trading psychology is a big part of being a successful option investor.
Stick to your guns. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.
Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.
Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. Let's get started First, choose a stock.
The caveat You must keep in mind that even long-term options have an expiration date. Back to the top.More...