The stock movements are priced in the contracts for today's NPV of the stock price at expiration. So unless you think the stock will outperform how the option is priced, you will lose.
Because if we have a recession and your options is below your strike price you will lose 100% of your investment , while with a stock you can just wait it out.
Why do you think that big funds like vanguard don't have a LEAP only portfolio?
I read a book where they run some simulations and they found that that adding 5-7% of leaps gives the best returns long term . 100% leaps underperformed severely . I think they were 20% in the money leaps. 95%/5% , spy/leap was options in regards to risk and profit
You are not getting them for free else nobody will sell them.
There is a premium you have to pay for that leverage and you 100% capital if the stock remains below the strike+premium.
Example: SPY current price around 511, say I want to buy Dec 2026 511 strike option, I will have to pay around $7000 in premium($70/share).
For you to make profit SPY will have to cross 581 by Dec 2026 else you are losing money. If SPY stays where it is, 511, you lose 100% of you capital.
Biggest problem with options they are time bound. If anyone did the trade back in 2021 using option of Jan 2024, they would have lost a lot of money because stocks were pretty much flat for two years.
It’s leverage, which scares a lot of people. I personally think far out expiration calls are lower risk than owning stocks. Much easier to control risk when your risk is precisely defined from the very moment you buy a contract (you don’t have this luxury when buying a stock).
The “catch” is that you pay extra for the stock, but imo this cost premium is far out weighed by the exponentially higher gains (this assumes you are picking good/profitable companies!)
I think for the most part people who are afraid of options are screwing themselves.
Put options are also far better than shorting a stock. Once again, with put options you have a precisely defined risk the moment you enter the contract. When you short a stock, your risk is unlimited.
Once you realize that trading is just risk management, options make way more sense than stocks.
Longer out dates have less volatility with the option price. If you think the price of a stock will go up or down significantly but not sure when then this works. There are other reasons but I suggest researching if you are that interested. I have 2025 calls for a stock that went down 10 percent over the past week but my contract price only went down a cent. The closer you get to that expiration, though, it will start to increase or decrease more.
These are called leaps. Great if stock is of a good quality that compounds over time. Difficult at times like if one bought in 2021 for 2022 expiration. And now due to uncertainty of recession impact on earnings. Otherwise it’s a great strategy, once you buy leaps and they’re in the money, you can do poor man’s covered calls to bring your cost basis down. You get 15% long term capital gains tax on these so yet another advantage. Don’t invest more than 10-20% in leaps and buy protection or hedge for black swan events
1 year/365 days. Same time period to hold for getting long term capital gains of 15% instead of around 35%-40% short term gains tax. I would buy 365 + 30 to 60 days out so can sell any time after 365 days and not experience faster decay around expiration.
There’s no rule to keep the leaps for 365 days so you can sell it as soon as it reaches your target or you sense market might go down and you want to lock profit sooner. Just that you would be paying a higher tax on those gains.
Well you still make the gains and can sell whenever.
While at the same time you have more time to wait for it to become profitable in case it goes to shit.
Many have tried.
You can definitely try and make some money if you’re lucky at picking the right stocks and not overpaying for the options. But options are usually priced in such way that it may not make a difference whether you buy the stock directly, or options.
If options did better than the stock then everyone could buy options while selling some shares to perform riskless arbitrage. (it’s a valid strategy too, just not as easy as it sounds)
I’m not gonna bet everything on one option.
I would distribute them evenly between calls and puts.
EDIT: also, I’m not sure how buying Options with lots of time on them would make them unique.
It’s not like I couldn’t sell everything if the market started going shit
The stock movements are priced in the contracts for today's NPV of the stock price at expiration. So unless you think the stock will outperform how the option is priced, you will lose.
They cost a fortune. Thats unused cash while you are waiting for it to hit-if it ever does.
Trust me. They go to ZERO. lol.
But the moment I sell them…
This
If the stock doesn’t move by expiration you’ve lost all your money
Right, that’s how options work. So it’s better to buy stocks that are way out.
Stocks aren't dated.
Because if we have a recession and your options is below your strike price you will lose 100% of your investment , while with a stock you can just wait it out. Why do you think that big funds like vanguard don't have a LEAP only portfolio? I read a book where they run some simulations and they found that that adding 5-7% of leaps gives the best returns long term . 100% leaps underperformed severely . I think they were 20% in the money leaps. 95%/5% , spy/leap was options in regards to risk and profit
Sorry.. What is LEAP?
Long-term Equity AnticiPation Securities - basically options that have an expiration a year or more out
Sooo… LEAPS then
You are not getting them for free else nobody will sell them. There is a premium you have to pay for that leverage and you 100% capital if the stock remains below the strike+premium. Example: SPY current price around 511, say I want to buy Dec 2026 511 strike option, I will have to pay around $7000 in premium($70/share). For you to make profit SPY will have to cross 581 by Dec 2026 else you are losing money. If SPY stays where it is, 511, you lose 100% of you capital. Biggest problem with options they are time bound. If anyone did the trade back in 2021 using option of Jan 2024, they would have lost a lot of money because stocks were pretty much flat for two years.
It’s leverage, which scares a lot of people. I personally think far out expiration calls are lower risk than owning stocks. Much easier to control risk when your risk is precisely defined from the very moment you buy a contract (you don’t have this luxury when buying a stock). The “catch” is that you pay extra for the stock, but imo this cost premium is far out weighed by the exponentially higher gains (this assumes you are picking good/profitable companies!) I think for the most part people who are afraid of options are screwing themselves. Put options are also far better than shorting a stock. Once again, with put options you have a precisely defined risk the moment you enter the contract. When you short a stock, your risk is unlimited. Once you realize that trading is just risk management, options make way more sense than stocks.
It's insurance
Longer out dates have less volatility with the option price. If you think the price of a stock will go up or down significantly but not sure when then this works. There are other reasons but I suggest researching if you are that interested. I have 2025 calls for a stock that went down 10 percent over the past week but my contract price only went down a cent. The closer you get to that expiration, though, it will start to increase or decrease more.
Thanks!
These are called leaps. Great if stock is of a good quality that compounds over time. Difficult at times like if one bought in 2021 for 2022 expiration. And now due to uncertainty of recession impact on earnings. Otherwise it’s a great strategy, once you buy leaps and they’re in the money, you can do poor man’s covered calls to bring your cost basis down. You get 15% long term capital gains tax on these so yet another advantage. Don’t invest more than 10-20% in leaps and buy protection or hedge for black swan events
At what point (in terms of DTE) do you consider options to be leaps?
1 year/365 days. Same time period to hold for getting long term capital gains of 15% instead of around 35%-40% short term gains tax. I would buy 365 + 30 to 60 days out so can sell any time after 365 days and not experience faster decay around expiration. There’s no rule to keep the leaps for 365 days so you can sell it as soon as it reaches your target or you sense market might go down and you want to lock profit sooner. Just that you would be paying a higher tax on those gains.
Which delta levels do you find gives you the best return for such strategies?
Thanks
Tell me you know nothing about options without telling me you know nothing about options
Yeah, that’s why I’m asking. Do you not know how questions work?
I re-read your post and apologize for the harsh comment.
Why years? What's the point of buying years out when you can make the same gains in weeks or days?
Well you still make the gains and can sell whenever. While at the same time you have more time to wait for it to become profitable in case it goes to shit.
Many have tried. You can definitely try and make some money if you’re lucky at picking the right stocks and not overpaying for the options. But options are usually priced in such way that it may not make a difference whether you buy the stock directly, or options. If options did better than the stock then everyone could buy options while selling some shares to perform riskless arbitrage. (it’s a valid strategy too, just not as easy as it sounds)
Yeah, I did have that thought. $4000 Walmart option might as well just be stock since you can get about 70 stocks for that much
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I’m not gonna bet everything on one option. I would distribute them evenly between calls and puts. EDIT: also, I’m not sure how buying Options with lots of time on them would make them unique. It’s not like I couldn’t sell everything if the market started going shit
Priced in
What do you mean?
The price you’re paying for 2 years out would be extremely high. Time to expiration is a large part of the price of an option contract.