How Much Could You Lose? What if you are wrong and INTC goes the other way? In the case of the LEAPS, no matter how far INTC falls, you won't lose more than your original $585 investment. If you bought the stock, the most you could lose is $5,850. The other side of the coin is that it's easier to lose a big percentage if you went the option route. Leverage cuts both ways. But still, even if you lose 100% of your LEAPS investment, you only lost $585. If you invested in INTC and lost 10%, that's a $585 loss already. Of course, as usual the example I use above is simplified to illustrate a point. If you were really trading the LEAPS you could sell to close the position at any time, so it's possible to realize a greater gain than given in my example depending on how the stock moves. LEAPS or Short-Term Options What about comparing LEAPS to shorter-term options? Because there is more time left to expiration for LEAPS, they suffer less from time decay, which accelerates the closer expiration gets. As a result, the delta of LEAPS is higher. In other words, a LEAPS behaves close to the underlying stock. The downside, though, is that the extra time value makes LEAPS more expensive than shorter-term options with the same strike price. In exchange for more time for the trade to work out in your favor, you have to pay a higher premium. LEAPS could also provide some long-term protection for your portfolio. I discussed a LEAPS call above, but you could also buy LEAPS puts as a hedge for your portfolio. You could also buy index LEAPS puts to hedge against a wide market pullback. On the other side of the trade, you could also take advantage of the higher premium to sell out-of-the-money covered LEAPS calls. If things work in your favor, the LEAPS will just expire worthless and you pocket the premium. You can select a strike price at which you would be happy to sell anyway, and the option premium provides extra income. As I've just explained, options trading is a proven way to generate profits, over the short or long term. By reading this article, you can see that options aren't "scary" for average investors. If you're looking to make even greater gains with options, turn to Investing Daily's in-house options expert, Jim Fink. I don't know of anyone who understands and uses options as profitably as Jim, who's a legend with his followers. If you don't already follow Jim's advice, I have good news for you: Now's your big chance. Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink's Inner Circle. He has agreed to show 500 smart investors how his "paragon" trading system could help them earn 2,500% in just one year. Paragon is a proprietary program created by Jim after years of trial-and-error. Jim's system generates trades that statistically guarantee you can turn small stock movements into winners that are up to 18 times better than what a traditional buy-and-hold investor would see. We've together a presentation to explain how paragon works. Want to learn Jim's money-making secrets? Click here now for details. |
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