Buying Deep in the Money Calls (LEAPS)

According to Lee Lowell (see his video here), it makes sense to buy calls with the expectation that they will go up in value. (These are also called LEAPS - long term expectation of appreciation.) 

Here are the benefits:
  • You spend less money on calls - maybe 30% 
  • But you gain if the underlying stock gains without having to own the shares... Here are the risks 
  • You can't buy and hold. Calls expire, so you have to pay attention to them. The maximum loss is the price of the option. 

Here are his rules for "designing" a LEAP
  • Got far enough out in expiration to "see a change" - maybe at least 9 months 
  • Go for at least a 90% delta 
  • Have a breakeven of near current price 
  • Have a stop-loss rule - maybe 20% drop of the underlying 

At expiration, what should we do with the option? 
  • Sell it 
  • Exercise it 
  • Roll it

Well, let's try it!  Let's track a LEAP and see what happens!

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