In this webinar, Keith Harwood, Chief Options Strategist at Option Hotline, will be joining us to outline and elaborate on the checklist he uses for his options trades. As a professional options trader, Keith has been using this checklist for more than a decade and he will share how and why it can work so well.
This is a great opportunity to learn from the professionals how they use options to attempt to generate leveraged returns.
Tomorrow, you could begin doubling your account every single month starting with one letter.
The letter will come from a 20-year trading professional named Ian Cooper. He says, “In 2022, following my trades you would be doubling even tripling your account some months. Let me show you how.”
He will show you exactly what to do... and he’ll give you the blueprint for just $1.
Using a LEAP – Covered Write allows investors to participate in the upside potential of a stock through the long-term call or LEAP, while taking advantage of the leverage inherent in options and the time decay of short-term options selling.
The Covered LEAP and the Covered Write are best used if you are bullish on the stock. By bullish I mean that you think the stock will outperform the market. If not, then why not just buy a Spider (S&P Depository Receipts), NASDAQ QQQ, or DIJA Diamond, since they will give you absolute performance of each of those recognizable indices.
And, as an investor, you can use the Covered Call Strategy as part of your portfolio management. Let’s say you have $100,000 to invest and you’re interested in technology stocks. Instead of buying shares outright, you can use the LEAP-Covered Calls to invest a portion – say 10 or 15 percent – of the money to participate in the upside potential of a stock. The remaining 85 to 90 percent of your principle can then be put into a Treasury bill making a modest 6 percent. That locks in a minimum profit for the bulk of the money, while your upside is the potential for that LEAP. Using LEAPS, you can then participate in several stocks at once, giving you, in effect, “several fishing lines in the water at once.” This is especially effective within a sector. With the leverage inherent in options, you can participate in a broader number of stocks – albeit for the time period defined by the duration of the options – than your capital would otherwise allow.
Working several stocks together you can, in the vernacular of the trading floor, avoid the “sin” commonly known as “right church, wrong pew.” At times, stock investors can pick the right industry, but they buy the wrong stock within that sector.
Using this LEAP strategy, you can participate in the upside potential of several different stocks with the same investment that you’d need to buy only a few hundred shares of just one company. Then, for up to two years, you can participate in the upside potential of several companies – not just Internet stocks. Maybe you’re interested in telecommunications, but which stock to buy? You can leverage your money across a sector with LEAPS and, in effect, sit in many different pews in the same church. And with exposure across several different stocks, you can potentially improve your returns – especially if you happen to catch a fast-rising issue.
Similarly, you can use the LEAP strategy to participate across several sectors. Maybe you’ve enjoyed a good run in telecommunications stocks, but you don’t want to sell, for example, WorldCom because it’s done so well. And if you do sell it out, you would have tax exposure due to capital gains. (Your tax exposure and best tax strategy are something that’s best left to you and your tax professional. My comments here are by way of illustration.)
So, you can leave your WorldCom stock and borrow against it on margin from your brokerage firm, and put that margined money into other LEAPS on stocks in other sectors. This is a very effective strategy for getting additional capital and freeing up capital for diversifications in other investments. That includes investments within a sector and across sectors.
There are variations on this theme. You could buy an in-the-money LEAP call, which would work much more like a Covered Write (in a Covered Write, you buy the stock and sell a short-term call), because an in-the-money option tends to move like the stock. Or you could buy an out-of-the-money option that tracks somewhere 50 percent to 30 percent of movement of that particular stock. With out-of-the-money options, you don’t get the full appreciation of the stock movement, but you pay less money.
The pricing of these options reflects both the intrinsic and extrinsic value. Here’s an illustration: If a stock is trading at $110 a share and you buy a call with a strike price of $105, it’s $5 in-the-money. That $5 is also reflective of the intrinsic value or the difference between the strike price of an in-the-money option and the price at which the stock is trading.
The extrinsic value is the amount of the premium in excess of the intrinsic value. For example, if you bought this option for $15, then the extrinsic value would be equal to $10. The stock was trading at $110 and the strike price was $105, so that $5 is intrinsic value and the additional $10 was time premium or extrinsic value.
But if you bought an out-of-the-money $120 LEAP call, it would have no intrinsic value, because the call is above the current market price of the stock. Therefore, the premium you pay is all extrinsic value. In other words, the price you’re paying is all hope, and time for that hope to pan out. The longer that time horizon, of course, the more premium an option would normally hold.
Your strategy to use in-the-money options for the out-of-the-money variety depends largely upon your own plan and risk parameters. If you tell me that you want to own IBM, the best bet is not an out-of-the-money call, as the stock would have to make a dramatic move to reward you for your investment. Rather, if you want to own the stock, you‘d be better off buying a LEAP call that will move most like the stock. If the stock is trading at $110, then a $110 call will move more in step with the underlying shares than an option with a strike price at $115 or $120.
With LEAPS, an investor can take advantage of a long-term time horizon, which, at least in theory, increases the chances of a stock move occurring. But one thing to remember, these LEAPS are not designed to take advantage of short-term moves in the market. Because they are a long-term instrument, you’d be more interested in the movement of the stock over a longer time horizon of, say, two to three months to two to three years.
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