Buying “LEAPS CALLS” as a STOCK Substitute

Lets discuss on the very interesting TOPIC which is a substitute of buying STOCKS. Here’s a method of using calls that might work for the beginning option trader: buying long-term calls, or “LEAPS”.

The goal here is to reap benefits similar to those you’d see if you owned the stock, while limiting the risks you’d face by having the stock in your portfolio. In effect, your LEAPS call acts as a “stock substitute.”

WHAT ARE “LEAPS”?

LEAPS are longer-term options. The term stands for “Long-term Equity AnticiPation Securities,” in case you’re the kind of person who wonders about that sort of thing. And no, that capital P in AnticiPation wasn’t a typo, in case you’re the kind of person who wonders about that sort of thing too.

Options with more than 9 months until expiration are considered LEAPS. They behave just like other options, so don’t let the term confuse you. It simply means that they have a long “shelf-life”.

LET’S GET STARTED

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. You want to buy a LEAPS call that is deep in-the-money. (When talking about a call, “in-the-money” means the strike price is below the current stock price.) 

A general rule of thumb to use while running this strategy is to look for a delta of .80 or more at the strike price you choose.

Remember, a delta of .80 means that if the stock rises Rs1, then in theory, the price of your option will rise Rs 0.80. If delta is .90, then if the stock rises Rs 1, in theory your options will rise Rs 0.90, and so forth.

As a starting point, consider a LEAPS call that is at least 20% of the stock price in-the-money. 

(For example, if the underlying stock costs Rs100, buy a call with a strike price of Rs 80 or lower.) However, for particularly volatile stocks, you may need to go deeper in-the-money to get the delta you’re looking for.

The deeper in-the-money you go, the more expensive your option will be. That’s because it will have more intrinsic value. 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.

THE CAVEAT

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.

As a general rule of thumb, consider buying a call that won’t expire for at least a year or more. 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.

PICK A NUMBER

Now that you’ve chosen your strike price and month of expiration, you need to decide how many LEAPS calls to buy. You should usually trade the same quantity of options as the number of shares you’re accustomed to trading.

If you’d typically buy 100 shares, buy one call. If you’d typically buy 200 shares, buy two calls, and so on. Don’t go too crazy, because if your call options finish out-of-the-money, you may lose your entire investment.

HURRY UP AND WAIT

Now that you’ve purchased your LEAPS call(s), it’s time to play the waiting game. Just like when you’re trading stocks, you need to have a predefined price at which you’ll be satisfied with your option gains, and get out of your position. 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. Be consistent. Stick to your guns. Don’t panic. And don’t get too greedy.

 

HOW to get your shares insured…!!!

Dear Friends!!
In my previous article, we talk about the ‘Investor protection’ in the highly volatile MARKET where one can get the “Insurance of Shares” to safeguard their investments which directly invest into the MARKET but the question is how one should approach to get it from and where, please see the answer below –
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Let's now cover some of the detail -
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

The ‘Insurance Contract’ that we've been talking about here is nothing but to buy a ‘PUT OPTION’ roofed under the ‘Derivatives’ segment in the ‘Financial Markets’. An option is simply a promise and in this case we are buying a promise that someone else has made. You don't need to worry about finding the person or setting the premiums because the stock exchange does all that for you.

The ‘PUT Option’ we are buying has some terms to define exactly which option it is, because major stocks have heaps of option contracts available.

Thus the primary aim of the investors should be to protect their investments by using the combination of these products and also make a ‘perfect hedge’ against the overall risk.

*Also to note to our investors that these are very ‘sophisticated instruments’ & ‘high leveraged’ product meant for professional brokers and hedge funds to safeguard their investments hence small investors should be very cautious while using these products and it’s recommended to take professional advice in respect of the same before proceed further but on the same note it's an outstanding product, to make a good amount of profits in the MARKET, if it's cleverly used.

Take the time to get educated about Insuring your Shares as it's a valuable investing tool. But there's more to know before you start doing it.

“If you want to be rich, you need to be a business owner and an investor.” – Rich Dad

Have you ever heard about the Insurance of SHARES...read how to get it!!!!!

How to Protect yourself by Insuring your Shares :

The principle of Insuring your Shares is the same as Insuring your House or Car. And that principle is to protect your capital against loss.The process of Insuring your Shares however does not involve ringing an insurance company and buying a policy. It involves using other stock market instrument to give you protection, and because it involves other stock market instruments it is much more flexible.

The insurance we buy for our shares is essentially buying a promise; that's what all insurance is right. In the stock market the promise that we buy is the promise that we will definitely be able to sell our shares at a pre-agreed price regardless of what the market does,So if we insure our shares at 100, then even if the stock price falls to 2, we'll be able to sell our shares at the agreed insured price of 100.

We pay a premium for this insurance and the higher the insured price, the higher the premium. And, the longer the term of the insurance the higher the premium.
_________________________________________________________________.
So let's look at an example and then we can go into some of the detail- _________________________________________________________________
Let's say we buy 300 shares of XYZ @ 1000 i.e amounting Rs 3Lacs (1000x300). We could decide that we wanted to insure our shares at our buy price and this might cost 6-8K of the insurance premium approx. If we did this then no matter what happened to the share price as we could safeguard our shares @ 1000, even if the company collapsed and it's price went to zero we are at risk of only 6-8k premium that we paid to get it. If the stock price didn't collapse and hit the target levels then one can make a huge amount of profits.
So you can see that insurance in the stock market is much more flexible than house insurance or car insurance.Big investors treat the cost of insurance as a cost of owning shares. They simply won't buy shares without it. These guys often use this insurance to lock in profits for stocks that have risen in price i.e. they move their insurance price up, as the stock price rises.

If you find this article interesting and want to know more about the same then please let me know your priceless views in that regard so that further we post our article about "Educating how to insuring your Shares" as it's a valuable investing tool. But there's more to know before you start doing it.