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to talk about this type of strategy because for tomorrow morning we’re going to be talking about some thematic investing opportunities where we’re going to think about long-term opportunities with specific themes or specific sectors and helping you identify stocks that may fit a longer term theme and you can play those in multiple ways you can buy those stocks if you agree with those themes especially if you like the stock from a technical and fundamental perspective but you can also utilize options to take a longer term view on an underlying stock the benefit of utilizing options potentially is that you can take that longer term view with a smaller amount of capital outlay versus buying the stock and what it can do is protect you to the downside by outlaying a smaller amount of capital you’re risking less capital as well however one of the challenges with using options to take a longer term view is the time decay that you experience when you buy a call option so longer dated options can be utilized to help you offset some of that time decay or decrease the amount of time decay and we also have some additional ways that you can potentially decrease that time decay all together so that’s what we’re here to explore is how we can use longer term options or what we call leap options to play for a longer term view that you might have on an underlying stock or etf so let’s go ahead and get started before i do what we’re going to discuss here today is purely for education and demonstration purposes it is not a solicitation or recommendation to buy or sell any specific securities so for those of you that are new to options play welcome we’re going to be utilizing the tool here today to help you analyze some of the leap options that we’re going to be talking about so you can sign up for a free 30-day trial at optionsplay.com if you’re a new member this will give you a free 30-day trial to the full platform give you access to all of the member benefits such as the cyber security thematic investment webinar we’re going to be doing tomorrow morning and access to the tool the education and the trade ideas that we send out every single day so this is the second week of our december monthly options education themes last week we covered selling cover calls and cash secured puts on stocks that you want to own so december is really a thematic the theme for december is really helping you enhance your equity investments your stock investments today we’re talking about how to make long-term investments utilizing options and then next week we’re going to be doing our 2020 review uh looking at what we’ve accomplished here in 2020 and what we’re looking towards for 2021.
um so hopefully for you to join us here uh next thursday so today what we’re going to cover is firstly we’re going to talk about what are leap options so we’re just going to first define them they’re pretty easy to understand because if you understand call options you’ll understand leap options are not very difficult what’s more important is really when should you use leap options because they’re only useful for if you have a longer term view if you’re trying if you’re trying to trade a short term view do not use leap options we’re going to talk a little bit about that and then we’re going to talk about what are the optimal expiration dates and strike prices because just like any other option you have a lot of choices you can choose a short dated options elongated options you have a lot of different strike prices you want to make sure that you select the right strike price for the views that you have we have some tips as far as managing these leap strategies because leaps are you know a little different than trading a short-term call or even trading the stock so we want to talk about the differences in helping you understand the best practices around managing these trades and then we’re going to introduce a strategy called the poor man’s cover call again the challenge with buying any form of a call option or put option is the fact that you have time decay working against you the reason we’re buying a long dated option is to help you reduce that amount of time decay during the holding period but you can further reduce that time decay during your holding period by being more tactical by selling what we call a poor man’s cover call so we’re going to talk about what that means and then we’ll end this with a live session where we’re going to go through some symbols together we’ll pick some symbols that are currently in the markets a couple of you actually emailed me before the session asking me if we can cover a couple of symbols we’ll go over that and then open this up for q a here at the very very end but largely today’s session is actually going to be fairly easy because again a leap option is just a call option that’s it if you know call options you’ll understand leap options so the primary question that i want to help investors answer here for today is really how can you utilize leap options to reduce your risk for your longer term investments so how many of you currently invest in stocks or etfs for the long term please type one into the chat window which you can find at the bottom of your screen if you invest in any type of stocks or etfs for the long term and please type 2 if you if you don’t buy stocks or etfs for the long term also i just want to get a sense for the audience here in the room okay so a lot of ones a couple of twos for those of you that answered twos guess what perhaps this is not the best webinar for you because if you don’t have any long-term positions then you know leap options are not something you should be utilizing now if let’s say you answer two but you want to think about investing for the long term then stay on this webinar because leap options are suitable for you so that’s what we want to help you understand here for today okay so a lot of ones a few twos hopefully for those of you that answer twos you know maybe tomorrow morning session here so we’re doing a members only session tomorrow morning at 8 30 a.m where we’re going to be doing these thematic investing webinars so and the reason that we’re doing these thematic investing webinars is to give you a deeper dive into specific themes or sectors that we believe have long-term viability in the in the world that we’re going to see post 2020 so the one that the first one we’ve identified is cyber security we see some pretty interesting trends with cyber security we think this is an emerging sector for the for the for the technology sector so we want to number one give you a glimpse into what trends we currently see and what companies within the cyber security space we think are worth looking at and these types of trades are generally speaking can be useful for the next year two three potentially even as far as five years and this is really where you can leverage using some of the leap options that you’re going to learn here today to invest in the long term for these cyber security themes so that’s what we’re going to be doing tomorrow morning i hope for those of you that are members you’re either already signed up or you’ll be registered here tonight so that you can join us here tomorrow morning so my name is tony zhang i’m the chief strategist here at options play and i want to share with you the basics of call options so that you can help so that you can apply them to longer-term investing by understanding how long-dated options allow you to actually take the advantage of the payoff graphs of the payoffs of a call option but do so in a way where you reduce the downside of a call option which is time decay okay so let’s go ahead and get started um so you know when we’re thinking about understanding leap options you know some investors get a little confused about these long dated options the first thing i want to tell you is that a leap option and a call option are the exact same thing there is absolutely no difference between a leap option and a call option the only reason that we call them leaps are because they are meant to just describe options that expire longer than nine months from today but from an option contract perspective they are identical to a one week option a one month option a three month option a one year option three year option they are identical okay so number one there’s no difference between a call option and a leap option they’re just terms that we use for longer dated options we call them leaps now a long day a long call gives you what we call unlimited upside exposure with limited downside risk this is something that everyone here on this webinar if you have a basic understanding of options you already know a call option gives you unlimited upside so if the stock keeps going higher and higher and higher you make more and more money and if the stock goes lower and lower you have limited downside right this is something i think everyone here understands a long put which is you can buy a leap put as well gives you unlimited downside exposure down to zero so the stock can go lower and lower and lower all the way down to zero and you’ll keep making more and more money as long as the stock keeps going down but you have limited upside exposure so that if the stock goes higher instead you risk a certain amount of capital so i think everyone here understands this right so please type three into the chat window if this makes sense to you so the first thing we want to clarify is just the fact that when you trade leap options they are identical to a shorter dated call option or put option that you might be purchasing in your portfolio so when should you use a leap number one you will break this down into calls and puts uh i would say that when we look at the amount of volume that’s traded on leaps it’s probably skews to 80 percent of it is in calls and roughly only 20 percent of it is traded in puts meaning the vast vast majority of leap options that are traded are what we call bullish long-term views because generally speaking whenever we take a long-term view in the markets it’s very very it’s much more likely that it’s a bullish view then it is going to be a bearish view very very very um you know short term views are i’m sorry bearish views typically are much more short term we usually express those using two month options three month options we usually don’t need to buy a one-year option to express that a bearish view on the markets because bear markets generally speaking do not last very long even downtrends and stocks usually don’t last a very long time or they’re very very rare so that’s why again the vast majority of trades in leap options are in call options and they’re generally used as what we call a stock replacement strategy meaning they’re simply used in replacement for a stock position and we’re going to show you you know the benefits of it and some what the trade-offs that you’re making when you buy a leap option but basically what you’re doing is you’re trying to gain upside exposure you’re trying to say that i think a stock is going to go higher i want exposure to that move higher and i want to do it using options versus buying a stock now generally speaking you need to have a bullish outlook that’s at least two to three months to justify buying a leap option otherwise you should just buy a shorter dated option if you only think the stock’s going to go higher over the next 20 days you shouldn’t buy a leap option you should just buy a shorter dated option the second reason that you might want to buy a leap option is is actually very timely to where the current market is and that’s really to mitigate downside risks whenever a market is overbought or you find that we’ve already had an extended rally but you think that there’s a possibility that that that that stock can continue to go higher for the long run those are also reasons why you might want to use a a call option or a leap option because you have limited downside and we’re going to show you this with some real examples to make this a little easier to understand now on the put side like i said it’s very rare that someone has a long-term bearish view on a stock or an etf so which is why it’s not very common that you’d see these puts elongated puts that are traded very often but generally speaking you could potentially use it as a hedge against a stock or a portfolio of stocks where maybe you believe that the markets are going to enter a relatively long maybe recession um maybe you think that the markets are going to continue moving lower for an extended period of time this is really the only opportunity in my opinion to use a long-term put i mean out of the past 20 25 years of investing i think it’s really only the financial crisis was the 2008 financial crisis was probably the only time where it could have potentially made some sense for you to buy a long dated put option versus if you look at the coronavirus selloff we had in 2020 you know that lasted only a month doesn’t make sense to buy a one-year option when the bear market lasts only one month when they when they’re very quick and violent you don’t need long-term options to take advantage of that you need short-dated options actually you prefer to have short-dated options so again whenever you’re doing these leaps most of the time i wouldn’t necessarily use them for any type of bearish opportunities i would only generally use them for bullish opportunities does that make sense everyone please type 4 into the chat window and so you know so a couple of people said that they have had long-term bearish views and i’m not saying you can’t have long-term bearish views i’m just saying that they’re rare and that generally speaking they’re not very common okay um there obviously still are plenty of opportunities where you may have a long-term bearish view on a stock there’s nothing wrong with that uh just it just happens to be fairly rare so in order for us to understand calls i’m going to um i’m going to discuss a few different uh ideas right so first and i want to use some real ideas because i think it makes a little bit more concrete example of using leap options for a real stock that you guys might be able to relate to so you know ge this is one that we’ve been talking about lately because ge has started to break out from a long term downtrend and just to show you a chart here for ge um i’ll show you a long-term chart of ge here’s a weekly chart of ge back in december of 2016 the stock was trading around thirty dollars uh it pretty much has been declining for a very long time all the way down to about the six dollar range rallied up to 12 13 or so declined all the way down to six dollars again and just finally broke out a couple of weeks ago uh from this long-term bearish trend line here this is the trend line that i drew here if you look at this long-term bearish trend line here just a couple of weeks ago started to break out here so you know from my perspective if you were the type of fundamental investor maybe you believe in this turnaround story for ge stock and i’m not trying to make a case necessarily for ge stock right now i’m just saying that this is potentially an opportunity where someone could say i think ge could you know start heading back significantly higher there’s a lot more upside here from 11 to maybe you know the low 20s potentially all the way back up to 30.
so this is the type of long-term opportunity that you may want to either use a stock to buy the stock and play for significant upside or potentially utilize options to play that particular move so here’s where i’m going to suggest two positions one buying the stock and one buying the leaps so if i bought 100 shares of ge stock at 11.30 which is where it’s currently sitting this is the strategy that every single one of you on this call should be familiar with right this gives you unlimited upside meaning as long as the stock keeps going higher and higher and higher you’re gonna make more and more money and you’re risking a total of eleven hundred and thirty dollars on this particular trade because a hundred shares at eleven dollars and thirty cents is eleven hundred and thirty dollars worth of risk and your break even price on this particular trade is 11.30 cents which means if the stock goes higher you make money from here the stock if the stock goes lower you start losing money immediately so it’s dollar and dollar exposure it’s symmetrical exposure and you have potential gains immediately so let’s compare compare this to buying a january 2022 which is roughly about a year and a month from today and let’s say i buy a 10 call option i’m gonna come back to why i’m buying a ten dollar call option when the stock’s trading at eleven dollars and thirty cents now i looked at this earlier today and that ten dollar call option was trading at two dollars and 88 cents so what does a call option risk profile look like it looks somewhat similar to a long stock which gives you unlimited gains to the upside with limited protection to the downside or what we could normally would call like a married put where you’re along the stock and long the put because your max risk here is now only 288 or roughly 25 of the stock price meaning if you were to buy 100 shares of the stock it would cost you eleven hundred dollars to buy one contract of the of the ge call options would cost you 288 so the amount of capital that you need to purchase 100 shares of it is only 25 that gives you an implied leverage of about four to one now uh you also have to account for the delta so your real exposure your real leverage is about three to one here but you only need 25 percent of the capital of to buy 100 shares of a stock now ge is a low-priced stock right i think a lot of investors can afford a hundred shares of the stock but when we look at apple when we look at tesla when we look at amazon not everyone has the capital to buy 100 shares of that stock and this is really where an option strategy allows you to control that same 100 shares of the stock but do so in a way at a fraction of the amount of capital that’s required to get into the trade and you still maintain the same unlimited upside but you have limited downside here so no matter what happens even if ge goes bankrupt you’re only risking 288 dollars for every 100 shares versus 1100 for every 100 shares does that make sense everyone please type five into the chat window if that makes sense to you okay um and i see the you know one question about how does leap options mitigate overbought and i’ll walk you through that in one second but the one trade-off here that we’re making here when we when we’re buying a call option versus buying the stock is the fact that our our break even price on the call option is now 12.88 which is the 10 strike price plus the 10 strike price plus the 2.88 cents that we pay for it which gives us a break even price of 12.88 which means by january 2022 this option or the stock has to be above 12.88 in order for it to make sense for me to buy this leap because if it’s below 12 and 88 cents by january 2022 i’m gonna lose money on this particular trade so that’s the trade-off that you’re making here the stock basically has to rally about 13 over the next year and a month in order for me to be profitable on this trade versus the co if i bought the stock it’s profitable immediately as long as the stock starts moving up uh even by a penny i’m profitable so that’s a trade-off that you’re making here now when you look at a long-term charge here on ge you know 12.88 is roughly right here um 12.88 cents is roughly right here so basically over the next year ge has to go above that level so i mean i think that for anyone who’s bullish on ge they would probably believe that there’s a lot more upside than that 12.88 over the next year and a month or so um so this is really where you have to ask yourself do i think the stock is going to be above those levels by expiration in order for it to make sense now when i look at a trade like this that makes some sense right i’m risking only a quarter of the amount of capital and i need a 13 move to the upside to break even and i see that this stock has moved roughly you know about a hundred percent over the last few months so another 13 move over the next year i think is more than reasonable to potentially ask for so that’s really where you can utilize uh you know the charts to give you a sense for is this a trade that’s viable for me now the question before was saying you know how does a call option mitigate the the fact that this stock is overbought the answer is really coming down to the fact that you are risking a fraction of the capital meaning if this stock was to plummet back down to let’s say uh eight or seven dollars if you have bought a 100 shares of that stock you’re looking at roughly a 33 loss of your investment of a much larger investment versus if you bought the call option number one the the best thing about options is the fact that you have gamma working in your favor if the trade goes in your favor it’s going to increase delta if the trade goes against you it’s going to decrease delta so your exposure to the stock is actually going to get smaller as the stock declines so if you have a short term decline in the underlying stock it’s going to reduce the delta so for every one more dollar that the stock goes down you’re actually risking less per dollar than you would if you were buying the stock the stock you made you’re you’re losing one dollar for every dollar the stock goes down when you buy a call option for every dollar the stocks keep going down for the first dollar you might risk 70 cents on the dollar the second dollar you might risk 60 cents on the dollar next dollar you might only risk 50 cents on the dollar and the further it goes the less deltas that you actually have on the trade so that’s really one of the ways that we’re trying to help you mitigate some of the upside the exposure that you have when you buy a stock that is effectively overbought but you think can continue to move higher but in the short run if you get a pullback here you have an opportunity to limit the downside here you’re not risking as much as if you have bought the stock and of the stock and if you just get this completely wrong and the stock gets gets back down to seven bucks you’re risking substantially less capital on the call option than you would if you had bought 100 shares of that stock so that’s how we’re offsetting or helping you mitigate the potential downside that you have because of the fact that it is um overbought now you know now that we’ve looked at this right this particular example um you know we’re risking 25 of the underlying stock and the stock needs to move about 13 higher in order for it to make sense and i’m reducing my risk i’m reducing my uh you know i have lower cost to get into the trade and i’m maintaining my unlimited upside exposure that’s the characteristic if you will of buying a leap option as a replacement for the stock that you own now this is on ge stock which as actually you know in the grand scheme of things you know we think of ge as a pretty boring stock but it’s actually seen some sizable moves to the upside so you know i just want to take this a little bit to the extreme here and look at a stock like neo which a lot of you have been asking me about now here’s the thing from my perspective as neo right there’s two ways to play neo you’re either a very short term uh option i’m sorry a very short-term trader where you are familiar with technicals and you’re getting in and out of these types of trades within sometimes intraday maybe no more than a day or two because if you look at the price of neo you have very very volatile swings that happen in a very short amount of time here you know if we zoom in here you’re really looking at very volatile moves that happen within uh just basically two trading days where you have you know 10 20 30 moves happening within just a few trading days and unless you’re nimble enough to get in and out of each one of these swings i would imagine that it’s very difficult to be profitable as a short-term investor on neo but again if you look at a chart like neo and you think about you know what tesla looked like you know over the years right tesla was initially very you know this initial move here look very similar to what we’re seeing in neo right now when it moved from you know 50 to 180 came all the way back down to 50 before it’s now trading at hundred dollars right so so for some investors you know they’re asking themselves you know can neil be the next tesla and for those types of investors if you’re thinking long term you’re thinking if i want to buy neo for the next year or so that’s really where you could potentially then look at options as a way to limit your risk so buying a hundred shares of the stock it’s a higher price stock at forty four dollars and eighty cents you know to buy a hundred shares of the stock i’m now risking forty four hundred dollars i have unlimited gains to the upside and my breakeven price is 44.80 but just to compare that if i look at the january 22 uh 2022 i buy 42 call option this cost me 2300.
i’m sorry twenty three dollars and eighty cents or twenty three hundred dollars but as you can see here now because neo is actually far more volatile than the ge the call options are really expensive it’s actually fifty three percent of the stock price to buy that call option it’s costing 53 percent of the stock price to buy a january 22 uh call option and the big difference here is the fact that your break even price on your january 22 dollar call option is 65 and 80 cents the stock has to go about 47 percent higher over the next year before this strategy is even profitable so much much more so neo is more volatile which means that the call options are going to be more expensive and that’s why when you look at a stock like neo um you’re going to see that you’re going to need a big move here to the upside so the breakeven price i said was 65 65 is up here so neo has never reached 65 here before so it’s actually up here 65.
so neo would have to be above 65 in order by next year in order for this to break even so you have to ask yourself what are the long-term viability of neo you know you know yes certainly the stock has moved from uh you know 23 dollars to 55 in a very short amount of time so it’s very possible that it could be above 65 by the end of next year but you know tesla also came crashing back down to about 20 level before it continued to move higher here so you have to factor in other things as well right you have to think about the technicals long-term and as a long-term investor i would argue that you should always look at perhaps a weekly chart rather than a daily chart and look at the weekly chart and see this stock was at 3.50 back here in may it’s now trading at 45 does that make a lot of sense you know is there potentially a bigger pullback here before i look for a long-term opportunity you know if we zoom into tesla that’s largely what we saw here let’s just um let’s just put this into perspective here for tesla right tesla went from 40 40 uh five to 50 or so all the way up to 180 came crashing back down to about 70 before it continued to move higher here this move in my opinion that we’re seeing in neo is really not too different from the initial move that we saw here in tesla and then we saw a give back of almost 90 percent before it continued to move higher now that doesn’t mean in my opinion that neo is going to come back crashing down 90 but as just be aware of you know the electrical vehicle space how volatile it is and what you can potentially expect to see from a stock like neo that effectively has gone parabolic the same way tesla did it’s starting to pull back here and in my opinion potentially has a little bit more room to to pull back here before you look for that longer term opportunity here so for those of you that think neo is going to go to you know 700 like like tesla you know when it’s trading at 45 maybe buying that call option with the break-even price of 65 looks attractive because someone told you that you can buy tesla stock at sixty five dollars you probably would say well that sounds like a great investment when it’s trading at six hundred dollars so you know this is really how you should go about viewing whether or not a call option or a leap option is suitable for you as opposed to buying the underlying stock and from my perspective again you must take that longer term view you can’t use a short-term view here to play you know these uh using leap options you must take that longer term view so some of the benefits and limitations number one you get very similar exposure to the underlying stock but you have much more limited risk you generally have about two to four times leverage over the stock position so you are leveraging your capital but you’re doing so in a way with limited risk and the the real reason that we’re using long dated options is that when you buy a long dated option for each day that you hold on to the option you have very low time decay compared to if you bought let’s say a one day option i’m sorry a one month option so if you bought a a one year option versus a one month option and you held both for just one month and sold it the amount of of time premium that you would have lost in the one month option is going to be far far greater than what you lose on the one year option so that’s the generally speaking why you might want to utilize these leap options but there are some limitations number one they’re less liquid they’re not as liquid as your front month trades so if you’re trying to trade you know a one-year option in neo you’re not going to find the same liquidity as you’re going to find in those weekly options or the front month options they also do not receive dividends so if you’re investing in the long run on a dividend-paying stock you’re going to not carry you’re not going to gain that dividend income from that long leap and lastly it’s not available on all stocks it is available on a very broad number of stocks actually you actually have about 2 500 stocks and etfs and indices that you can trade leap options on so it is a very broad base availability but again leap options are options that expire greater than nine months from today and what the goal of these long dated options is really to allow you to take a longer term exposure in an underlying stock but do so in a way with relatively low amount of time decay compared to buying a shorter dated option so when we’re looking at expiration dates generally you know because leap options are only options that are greater than nine months generally speaking you don’t have a lot of choice it’s usually one year or two year that’s really the only choices that you generally have with most of these so you can ask yourself you know how much how long is my view on this particular you know symbol or the stock or this thematic trade that i’m in that largely helps you determine whether you should buy a one-year option or or or a two-year option as far as strike prices go this is really where you want to buy an in-the-money option the reason that we want to buy an in the money option is to further reduce time decay when you buy an in the money option that has a 60 to 70 delta per day you’re paying almost no time decay so going back to the ge example here right um the difference between these two numbers is a dollar fifty so that means that the amount of time decay that i have over the next year uh is only a dollar fifty over a full year so you know if you take a dollar fifty uh whoops uh yeah a dollar fifty and i divided by three roughly let’s just call it 370 days or so maybe 380 um no almost 390 days that i have between now and january 2022 that means i’m losing less than three tenths of a percent or just under four tenths of a per uh one cent per day in time value there’s almost very very little time decay so when you buy a long dated option and you buy an option that’s in the money most of what you’re paying is intrinsic value you’re paying very little in extrinsic value um the extrinsic value here is 1.50 amortize that over effectively what is 400 days you’re paying fractions of a penny per day in time value and that’s the reason why you want to buy these longer dated options even if i only plan on holding on to this trade for three months then for those three months that i’m holding it i’m paying fractions of a penny in time decay versus if i bought a front month ge option let’s just give you a sense for if i bought a let’s say i bought a february uh let’s oh there are no february options let’s go to march let’s say i buy a march 11 option that’s gonna cost me a dollar thirty that has um uh in this particular case a dollar worth of extrinsic value but that’s amortized over 90 days uh 99 days so i’m basically paying a dollar over 100 days so i’m paying a penny a day one divided by 100 right so i’m paying a penny a day so i’m trading almost three times as much in time value for a march option than i am in those uh january 22 options so that’s is the reason why you might want to take a look at these leap options versus the the front month options and these in the money options have lower extrinsic value which means you have lower time decay and the cost is usually somewhere between 15 to 50 percent of the underlying stocks price now how much you know the the cost of the leap option is purely based on how volatile the underlying stock is so if you’re trading leap options on let’s say ibm you’re going to see it probably cost you you know maybe 20 percent but like i said with a very volatile name like neo you’re going to find it to be closer to 50 percent so it really depends on the the um uh the the the volatility of underlying stock that determines how expensive these leap options are going to be um so just to give you a you know you know i also get a lot of questions from investors when we look at leap options is looking at buying an out of the money versus in the money leap option i still kind of get a lot of questions from investors saying why wouldn’t you buy an out of the money leap option uh because you can make a higher return so it’s true that you can make a higher return but one of the things that you’re going to notice here so this is what i have here is comparing buying a hundred shares of a stock to buying an in the money leap and what you’re going to see is the difference between buying a sh the stock and buying in the in the money leap is that they’re very similar to each other if the stock doesn’t move you they’re they’re they’re virtually the same if the stock goes higher the leap option will make a little less money but you’ll largely make the same type of gains if it goes down you make the same type of gain losses if it goes really down that’s really where the leap option protects you right because the most you can lose on the leap option is how much you pay so the two are very similar and again leap options are meant as a stock replacement so what you’re trying to what you’re trying to mimic is the stock position that you would have but do so in a way with the fraction of the amount of capital because to buy a hundred shares of stock will cost you a hundred dollars to buy a leap option only cost you twenty dollars so for a fraction of the amount of capital you’re replicating the stock position that’s the reason that we’re buying in the money leap options you can buy an out of the money leave options so here’s a 100 stock you can buy a 110 leap option it’s going to be much cheaper right so instead of paying 100 you pay five dollars so now it only takes you five percent of the underlying capital but what you see is that you know the the trade is really more like a a lottery ticket because even if the stock makes a big move you don’t make a big gain only if the stock makes an astronomical move do you start to see gains otherwise you’re just seeing a small loss you basically have this hockey stick trade where you have a very high probability of losing a small amount of money and then a very low probability of potentially hitting it out of the park so from my perspective that’s way more speculative and it’s okay to do that but as long as you understand that you’re not replicating the stock position you’re trying to replicate more of a lottery ticket type payoff graph there’s nothing wrong with lottery tickets as long as you understand what you’re trading that when you buy an out of the money leap you’re not trading a stock replacement strategy you’re replacing what’s more like a lottery ticket okay so just a few tips about trading leaps number one when you think about trading leaps you really should think of it as very similar to entering and exiting the strategy the same way you would buy and sell an underlying stock it’s a stock replacement strategy so when you’re entering and exiting it similar to when you decide to buy or sell an underlying stock now we talked about the fact that you know buying a leap option the long dated option and buying the in the money option is designed in a way so that you minimize time decay but you can actually do something a little further to even further reduce your time decay and that’s selling what we call a poor man’s cover call and i’m going to show you the next slide what a poor man’s cover call means but you can actually further reduce your risk and further reduce your time decay by selling call options against the long leap that you have so for those of you that are familiar this is like turning your long leap either into a calendar or a diagonal and the goal here is to take self short dated options that will bring in a little bit of premium that’s going to offset the time decay that you that you um have on the long leap that you’ve purchased now as far as the entry of a leap option you want to enter when you have a long-term bullish or bearish outlook on a stock or etf so for example for ge i saw that breakout on the weekly chart that was a potential long-term bullish opportunity that’s why i entered that long-term ge call option as far as an exit strategy for a leap option this is the same with any type of long call or put you always want to exit before expiration at either a gain or a loss now let’s say you buy a one year option of ge and let’s say six months into the trade ge is now trading at 15 or 18 and you think that you you know ge can continue to go on you think it’s gonna keep going for the next two to three years you still should exit your leap and simply roll your lead maybe at that point into 2023 or 2024 or whatever options are available at that point but you want to continuously roll your leaps but you don’t want to hold them in the last two to three months of expiration because again you start to get faster and faster time decay as you approach that two to three month mark so you know if you trade a nine month option you might want to hold it no longer than six months if you buy a one year option you want to hold it roughly nine months before you start rolling them because once you get into that three month period time decay starts to accelerate and you’re going to start paying more per day and that’s what you want to avoid when you’re buying a leap option and lastly you know you should set stop loss and take profit levels based on the stock price so when i showed you this ge chart when i showed you this whoops when i showed you this ge chart you know from my perspective i would set some stop losses maybe in this eight dollar level here if it got below eight dollars and filled this gap i would say that my bullish view here on ge is probably incorrect and i would start you know taking uh some profits here you know if i was trading multiple contracts first of all i would think that i have an immediate target of about thirteen dollars here to the upside if i look longer term um i would have some uh targets maybe up here in the 15 range or so and you can kind of use these technical levels as potential targets right so you might have multiple um targets you might have multiple contracts you might take one contract out of 13 one at 15 and have a few left for 18.
um you know that type of the same way that you would trade a stock or or you know like in or build the stock position and and exit a stock position you should try to do the same thing with your lead positions okay so lastly what i want to talk a little bit about is a poor man’s cover call this is you know the term poor man’s cover call came from the fact that you know some investors said that i could i don’t have enough capital to buy 100 shares of a stock in order to sell a cover call so i’m going to replace the stock position with a leap option that’s where the term poor man’s cover call from you couldn’t afford to buy 100 shares so you could afford to buy a leap option and then you can sell cover calls against a leap because that’s just a calendar or a diagonal so you know most of us are tr are used to trading shorter data diagonals and calendars but you can also do them on leap options now as a general methodology the you know which expiration date and strike price that you sell on your cover calls it’s the same whether you own the stock or if you replace that stock with a leap you would sell the same 45 day option you would shoot for roughly about a 20 delta on that cover call but there is a major difference between buying a selling cover calls on a leap versus selling cover calls on a stock so the most important thing to remember is that when you sell cover calls on a leap option or if you’re trading these poor man cover calls you must roll your short calls two to three weeks before expiration you cannot let the stock get called away because if you let the stock get called away guess what you don’t actually own the stock you will actually end up with a short stock position on monday now you’re going to have to either satisfy the margin call pay the you know the cash in order to get out of the short call the short stock position or you’re going to have to exercise your long leap now it never ever makes sense to exercise your call options early which is why this is not in a position that you want to find yourself in so at all costs you never ever want to have a short call on a performance cover call be exercised and one of the best ways to avoid that is to make sure that you roll your calls two to three weeks from expiration so that you avoid all assignment risk you avoid all early you know dividend capture risk and rolling out two to three weeks helps you avoid that this way you never are put in a position where you have to exercise your long leap in order to satisfy your short stock position that is not a position that you want to be in so those are some of the tips that i have regarding trading leap options so with that what i want to do is i want to just go through maybe just one more example here uh you know someone asked me to take a look at boeing and i think this is an interesting you know position to look at because some of you are saying well you think aviation is going to recover here two to three years out so you want to take a look at a long-term view here on boeing so you know let’s just take a look at this right so buying 100s or boeing would cost me 23 23 000 to buy a january 2022 now here’s the thing i would buy roughly about a 60 to 70 delta option so maybe i look at maybe something like a 225 option as you can see that cost five thousand two hundred and ninety dollars now my break even point here is 277 so 277 is up here um whoops 277 is up here so basically i’m saying that by january 2022 i think boeing will be above 277.
i’m not personally as bullish on this particular stock some of you may be on boeing so this is really how you can determine do you want to buy boeing so here you know five thousand two hundred and ninety dollars means that i’m my my ratio here or my leverage here is about just just about four to one or so just a little bit shy of four to one um or a little bit more than four to one because it cost me about 25 percent of the cost to buy a hundred shares versus buying the call option but i need the stock to move all the way up to 277 in order for me to be profitable so that’s not a small move right but it’s also not an astronomical move considering the stock just moved from 146 to 234 over the past month or so so another move of 30 bucks to the upside is certainly within the possibilities in my opinion of boeing and that’s really where you know you want to utilize this tool like options play to put in the stock that you have a long-term bullish view on and then use the uh the p l simulator to put on a a longer term view and you can try different expirations uh different strike prices but generally speaking you want to be in the 60 to 70 deltas you don’t want to go too far deep in the money you can but then you’re risking more capital to do so and i generally don’t think that it’s worth risking that additional capital you know instead of risking you know five thousand dollars here you’re risking ten thousand dollars to buy deep in the money call option i just don’t think it’s worth it to do that in my opinion um it does reduce your your um break even price that’s one of the benefits of going deep in the money is that the deeper you go in the morning money the more it replicates the stock but it also gets closer to the price of that stock so you’re trying to find that balance and that’s why we always advocate that you use a delta that’s somewhere in the 60 to 70 range because you really get that balance between having that stock replacement strategy but also at a fairly low cost you know a fraction of the cost of the stock position that’s really the what you’re shooting for is to be being able to replicate the stock position at a fraction of the cost and also reducing your risk right so if boeing you know crashes back down to 150 you know you’re not risking in this particular case 30 of the stock to do that um to to to take that long-term bullish view you might be only risking 10 or 15 percent when you buy a call option because again gamma works in your favor if the stock starts to decline you’re losing less per dollar because gamma is going to reduce that delta for you so with that that covers what i wanted to share with you here today regarding leap options i hope that this was helpful in giving you a better understanding as to you know how leap options work what are the different things that you should look for be aware of before you decide to portray these leap options so what i’ll do at this point is i’ll open this up for q a i just want to remind everyone this is a i think a very timely session for what we’re going to teach tomorrow morning which is our thematic investing we’re launching a new thematic investing series this is something we’re going to continue to do um throughout 2021 we’re going to identify different themes and these are longer term themes right so these are themes that we’re looking at at least one year but we’re also looking at three to five years on these types of thematic investing themes so the next one the one we’re doing tomorrow morning is on cyber security so if you take what you’ve learned here today and you use it for your um for your for your lessons tomorrow you can apply some of the things that you’ve learned here today to some of the stocks that you’re going to learn tomorrow that you may look at and say i agree with that on a long-term basis let me utilize leap options to play for a bullish view on some of the cyber security names or even just cyber security as a whole as an industry um you can utilize the leap options to do so so for everyone that’s looking for the registration link you can log on to options play this is a members only webinar so that you log on to options play the link is right there on your screen as the first pop-up if you’ve missed it you can always click on the megaphone button here at the bottom of your screen when you click on that it’s going to bring back the pop-up and just click on the register now button in order to register for tomorrow morning session so i hope to see you there uh everyone there tomorrow morning so at this point what i’ll do is i’ll open this up for q a um there’s a q a window and there’s a chat window i know a lot of you have submitted questions in the chat window but please if you have a question please type them into the chat i’m sorry the q a window at the bottom of your screen and i’m going to answer the questions in order out of the q a window below so if you had a question please post it into the q a window um uh jack is saying you know amazing work tony often i see leaps carry huge spreads how do you suggest dealing with that so jock this is something that i covered in one of my webinars which where we talked about liquidity you know this the one thing to remember is that the spread reflects you know the advertised price the spread does not reflect what you have to pay think of the spread as the sticker price use the midpoint as your guide for what the fair value of something is let me try to pull something i’m guessing neo probably has a pretty wide spread let’s take a look at that um it’s not too wide um so as you can see neo is actually pretty tight um i take that back um what’s a stock that i think would have a wide spread um [Music] you know i don’t really look at too many symbols that are not very liquid maybe pollen also not very wide um these probably trade very often that’s why you don’t see um wide spreads uh let’s see i don’t know what symbol this is but here you know what if i just go for a small cap stock um amc networks that might be one that has a small cap um [Music] it has a large spread nope can’t seem to find any stocks with the with the large spread so um [Music] ah here’s one i i bet a sure guarantee probably has a pretty wide spread they don’t have leap options also not very wide this is actually providing thing uh quite difficult to find one of the widespread accenture because centra has a widespread oh i can’t believe it’s so difficult to find one of the widespread um draftkings have wide spreads i find that hard to believe let’s take a look nope 10 cent spread okay anyway let’s just let’s just pretend for one second right let’s say let’s pretend this is 18 by 14 and we have a midpoint of 16 right that’s a wide spread two dollar spread on the upside two dollar spread on the downside if you see these wide spreads think of 18 as your advertised sticker price think about walking onto a car dealership and that’s the sticker price you see on the window do you pay that sticker price the answer is no you always negotiate the question is where do you start your negotiations and that’s where the mid price gives you a starting point the midpoint tells you roughly what the fair value of an option is so what that means is that you start from the fair value and you start bidding your way up right you say okay i’ll pay 16 and maybe 16 and 5 cents and maybe the car dealer says nope i’m not going to willing to you know sell it to you at that which means your limit order just sits there meaning the market maker or the computer rather says i’m not interested in selling it to you at sixteen dollars and five cents try again effectively then you can say okay i’m gonna i’m gonna try submit another order for sixteen dollars and ten cents maybe it still sits there submit aurora for 16 and 15 cents and what you’re going to find is that you’re never going to have to get close to that 18 sticker price before the algorithm or the computer says okay i’m willing to to play ball because at the end of the day you know a wide spread of 15 cents that’s 15 per contract that’s a lot of money for a market maker market makers usually work on pennies on per contract you’re talking about 15 a contract so um you know or they’re used to working in you know dollars one or two dollars per contract you’re offering effectively what is 15 per contract in terms of above the fair value so don’t be afraid of interacting with the quote jock but if it is very wide then generally speaking you probably shouldn’t trade it can leaps be used as a long-term bullish play on an underline um jack that’s exactly what we’re what we’re talking about here is using leaps as a bullish as a bullish for the underlying um so you know roger your your specific strategy your specific position that you have in space unfortunately i i’m not here to to look at individual you know positions i’m also here not here to provide investment a personal investment advice you can send me an email and i can provide you with what i consider general best practices but just to be clear here we’re not here to provide personal investment advice for your specific positions or your posit your specific uh trades um i would like to know the effect of dividends on a leap um the effect on the dividends the effect that dividends have on elite now in theory dividends have an effect meaning they’re already baked into the price of the leap option so they don’t in itself have any effect on the dividends but you know the dividends are effectively already stripped out from the price of the call option that you’re purchasing because when you’re purchasing the call option you’re effectively purchasing a future purchase and that’s already accounting for uh potential dividends that are going to be paid during the lifetime of your leap mark is saying why debit mark if you don’t mind clarifying what you mean by why debit i’m happy to answer that question terry’s saying once you send out a copy of the live video what is the procedure um terry the procedure for what um you can view we’ll all we record every single session and we send you a link that’s on youtube so that you can view it at your own pace oh terry’s saying to find this the slide so all the slides are always on the description of every single video so if you go to our youtube channel whoops for any video that you find on our youtube channel uh so let’s say you looked at the video from last week enhancing your equity positions using options in the description as you can see here in the description the link to the slides are always in the description so if you always if you want a copy of any slide that we post on youtube uh the the description always has a link to the slides why are you looking at in the money leaps so cliff i think i showed you a slide as to comparing the in the money versus out of the money leaps the in the money leaps are meant to be a stock replacement that’s the reason why we use that uh what about leap spreads you should never ever trade a leap spread the reason that we’re buying a leap is to re is to reduce time decay the reason that we trade a spread is because spreads allow us to reduce time decay now spreads only work if you sell short dated options so that’s why well i take that back you should trade leap spreads but only in the form of a poor man’s cover call always sell short dated options never ever sell a nine month option because you completely negate the benefit of selling options when you sell a nine month option because there’s no time decay in that nine month option so never ever sell you know a nine month vertical or trade a nine month vertical because you lose the time decay factor of that short call or put will you address the strategy of buying a strike for january 2020 which has minimal premium that has worked for me in apple and or microsoft so alfred i would say that that only has worked for you in apple and microsoft that largely has not worked in any other stock in 2020.
karoon is lower i so i would say that you know your view of buying out of the money leap options um you know that’s more of a um an exception rather than the rule uh karoon is saying is lower iv like is a critical for selecting leaps if so do you if so do you think that it’s good to invest in leaps with lower iv so croon leaps with lower iv will generate higher profits but just because you have high iv does not mean that you shouldn’t buy the leap options just that if you buy a leap option with higher iv or higher implied volatility your profits are going to be slightly less but that doesn’t mean that you can’t buy a leap with a higher iv could you sell a naked put to cover part of the dollar fifty um yeah absolutely so the question was uh eileen is asking if i’m paying let’s say let’s go back to the ge example if i’m buying this long dated january 20 10 call option for two dollars and 88 cents can i sell a short term sell a naked put to cover the part of that absolutely i would i would highly recommend that actually um you can sell let’s say a 10 put collect in this particular case 20 cents so in 36 days you’re collecting roughly 10 of the cost of that long call option that is another i would say creative way to offset the cost of that long call option now the thing about shorting a put is that you’re going to now have a huge margin requirement to do so so what this what this does negate from my perspective eileen is the cost factor right because the reason that you buy a put out you buy a a leap option many times is because you don’t want to put up the capital to buy a hundred shares of the stock if you sold a put you’re going to have to put up the capital to buy a hundred shares in the stock so you lose that factor of you know the the cheapness if you will of the call option um so that is one reason why you may not sell the put but if you have the capital that is another creative way to offset the cost of that long leap um scott i think your question of whether you would sell weekly or monthly calls against it that’s exactly what we did cover in our poor man’s cover call jay is saying doesn’t the cost of the option include the cost of time decay therefore you pay for the time decay when you purchase the option jay you pay for the you pay for the the cost of time decay when you purchase the option but you get it back when you sell the option so if let’s say you buy a one-year option and you sell it one month in then you’re getting back 11 months worth of time decay so you only fully pay for the time decay if you hold it for the total investment period so um it’s not you’re not actually paying it all up front and you immediately you know pay it you know the the option contract still holds that time value so if you pay for a year’s worth of time value and 11 months in or one month in you sell it then you’re effectively selling back or getting back 11 months of time decay so i hope that answered your question what does leap stand for learn it stands for long long expiration anticipated participation uh great question actually leap options long long term equity anticipation securities that’s what leap options stand for i’ll be honest i don’t think it’s the greatest term if you will but leaps you know it makes a little bit of sense are there are you in any leaps right now i’m the one that i’m in is ge that’s why i use it as an example uh wayne is saying what delta range should be targeted for leap purchases so generally i find the 60 to 70 delta is the sweet spot for these leap purchases uh does that mean holding the short for maximum of two weeks uh i think if you’re talking about the the um the the cover call side so we usually sell cover calls about a 45 days out and if you uh you know buy them back about two weeks out you’re holding them for roughly about a month’s worth of time so a little longer than two weeks would you consider a synthetic long call leap call and sell the leap put so dorothy i don’t think that that makes any sense because now you’re buying so the question from dorothy is so dorothy was asking would i then sell the january 10 put options um and trade this right so as you can see the long stock and the synthetic stock position are identical the reason that i don’t think that makes any sense is because number one it would cost you the same amount of money as buying 100 shares number two you now have two transaction costs you have a long call long put that you have to get in and out of now we know that the transaction costs for long calls and long puts are far far larger than buying the stock so you’re adding a lot more complexity you’re adding a lot more transaction cost um and you have effectively the exact same risk profile as along the stock so you might as well just buy the stock if you’re going to trade a synthetic you know long stock position you might as well just buy the stock there’s no better there’s no reason that you have a better risk profile by trading the synthetic versus the stock itself synthetic should only be used when you can’t trade the underlying itself now you know when we’re talking about equity options that’s never the case so i don’t think there’s a good reason to trade the synthetic versus just buying the stock itself is google a good leap stop option stock so shanti you know if you believe google is going to go higher i think this is a good example of one that you might want to buy a leap option on because you know to buy a hundred shares of the stock cost you 176 000 not everyone has the ability to do that but leap options are still going to be expensive on this but as you can see if i bought a let’s just call it a 60 delta you know it cost me 25 000 so a fraction of the cost so you know this is a good example of a leap option but that doesn’t you know but the question is whether or not you think google is going to continue moving higher if you think google is a good long-term investment then i think you know this is a good example of a leap option is a good replacement for the stock itself steven is saying can you sell cover calls against a leap in a registered account so stephen if you’re talking about a registered account in canada my answer i believe the answer to that and to the question is no um what is the expiration for the poor man’s cover call should be it’s the same as you would use for a regular cover call which is 45 days that’s if you for those of you that are members you have access to our uh cover call report our cover call report will always select roughly 45 days out so right now on december 10th that’s going to be the january 22nd options expiration so 40 45 days out is the um the cover call that you want to use leap options only for bullish view yes um generally speaking yes that’s what we covered in the beginning is that it’s very rare that you would use leap options for a bearish fee dennis is saying would you ever would you ever could talk about synthetic stock buying so dennis i just talked about synthetic stock buying so again you know synthetics are traded when you can’t trade the underlying meaning you you trade a synthetic because for various reasons you can’t you can’t trade the underlying so you know maybe um you know i don’t know the vix you know trading vix options a synthetic long position because there’s no you can’t buy the vix um you know or maybe uh something that replicates something that you can’t buy but from my perspective there’s no good reason to trade a synthetic long stock position when you can trade the stock itself the transaction cost for stocks is virtually zero the bid ask spread on a on a stock is literally one penny but if you have to trade the bid ask spread on the call side the bid ask spread on the put side you have to pay 65 cents a contract on the call and the put you’re just adding a lot more transaction cost you’re adding a lot more complexity for no good reason so for those reasons i don’t think it makes any sense to trade a synthetic long position for a stock when you can just trade the stock itself bob during this very interesting seminar i was interrupted for about 30 minutes hope you’ll be sending out a recording bob all of our webinars are always recorded and we will send you the recording do you roll up or down the 60 delta also so thomas i generally tend to find that with these types of leap options you every three months or so you know if the stock goes substantially higher substantially lower you may want to roll up or down but it’s not something that you do on a very high frequent basis you know usually every few months you re-evaluate your deltas and maybe adjust so that you get back into that 60 to 70 delta sweet spot eric is saying what are the technical decisions drive drivers on choosing one year out versus two year out um eric it really just depends on the time frame that you’re looking at this chart right so here’s the ge chart this goes from 2016 to 2020.
so it really just depends on the the time frame of chart that you’re looking at the the method of analysis is the same it’s just the times frame that you’re evaluating that determines how far out you’re looking do you as you sell the poor man’s cover call if it rises a lot suddenly we may lose a lot of money so you’re not actually losing money because whatever you lost on the short call you’re going to make on the long call this is the same thing that you have in a cover call right so when you sort a call and the stock goes higher let’s say you sold a ge call when it was trading at i don’t know six dollars you sold the nine dollar call option and the stock shoots up higher yes you lose money on the short call but you gain every penny back on the long call so whatever you lose you gain back so it’s not an actual loss um but you’re right that is a risk that you take with the poor man’s cover call why why do you think leaps are not very common in the market compared to short-term options um because you can’t because you know the short-term options is really where you can make a lot of money very quickly people tend to gravitate towards that people tend to gravitate towards lottery ticket type payoff graphs um you know it’s not sustainable though you know this has happened many many times in the history of options trading you know what we we saw in the year of 2020 is not exclusive to 2020 we saw the same thing during the dot-com boom we saw versions of it during 2008.
it’s not a sustainable style of trading trading one-week options you know it’s the type of trading that makes you a lot of money but also lose you know you lose a lot of money very very quickly as well it’s more like gambling and it’s not sustainable um you know leap options are used by more institutions rather than retail retail traders typically just like to buy the stock but this is hopefully enlightening lighting you as far as how you can potentially replace those stocks with some options would you ever use a debit spread of the leap strategy no i would never use a debit spread because again it doesn’t make sense to sell that one year option it makes sense to buy the one year option because you lower time decay but then when you sell that one year option you have no offset of that time decay so never ever trade a vertical elite vertical spread spy the long term leap sell a short dated leap against it a short dated call against it um nicholas uh you know of broadcom i have no idea how broadcom earnings came out here today it is trading down at four hundred dollars so similar to the koopa trade before you know it’s only down two and a half percent um over i i’m very bullish here on the on the semiconductor stock so i’m going to hold on to this uh it didn’t doesn’t seem like it blew out earnings uh it didn’t do particularly well but didn’t do very badly so i’m going to hold on to this look for potential recovery over the next couple of days the same way we’re looking at koopa um as as for the trade so i i just looked at this today for the first time because i was on the session here today how is macy’s for leaps so deepak you know that i don’t i’m not here to provide investment advice especially for the long term that’s for you to decide whether you want to invest in macy’s or not we’re here to provide you with the tools to decide whether this is the right leap for you but the chart for macy’s looks similar to ge you know i’ve had that recent breakout here to the upside um buying a 10 call option very expensive 4.15 cents you know so fairly expensive i would say for macy’s leaps example of leap option stocks include ge moses i’m not sure i understand your question as to what you mean by that um if you don’t mind clarifying any interest carry cost to consider for leaps um the the interest carries already built into the price of the leap so you don’t have to factor into any of that uh nicholas you’re very welcome vince is saying thanks for sharing your knowledge tonight one question how important is liquidity on your exit two to three months before expiration um liquidity is obviously a factor that you have to consider but you know options that expire two to three months are a lot more liquid than options that expire one year from today so the the longer you hold on to a leap the actually more liquid they actually become would you consider leaps for baba so tony i guess the question for you is are you a long-term investor in baba you know for me the the growth here in baba is is not that attractive i know some people laughed at me when i said that baba is only growing at 30 a year but if you look at chinese internet stocks they grow at much faster paces baba is not is on the lower end of that spectrum so baba for me not that um not not the first place that i would look if you’re looking at chinese internet stocks how do you calculate return raw or annualized it’s always raw and when you’re looking at the the returns here these are always raw returns we never do annualized returns on on on returns could you explain the poor man’s cover call again um so donovan you know i’ve explained it quite a few times it takes quite a bit of time if you don’t mind um please watch the recording um i think that’s the best way for you to uh re-understand the poor man’s cover call um tony going forward can you add theme stocks into the watch list so ralph that’s one of the things that we plan on doing is building thematic watch lists on stocks that we’re going to show you within the thematic trades uh patrick the max risk on the stock is not comparable to the max loss on the option because the option will go to zero but the stock probably going to zero is almost none so this might not might affect the comparison so patrick we don’t have to compare the stock going to zero we just have to compare the stock pulling back 10 to 20 percent you know macy’s has gone from six dollars to uh uh eleven dollars it doesn’t have to go to zero it just has to go back to nine dollars that’s a thirty percent decline in the underlying stock what’s that thirty percent decline in the stock going to do compared to a thirty percent decline in the leap that’s what we’re comparing is there a tool to use that identifies liquid leaps that are priced or at discounts of the stock so it’s really just as long as the stock itself is liquid or as long as the the front month options are liquid the leap options are going to be liquid they’re just not as liquid they’re still liquid for the most part two-year leaps only seem to cost fractionally more than the one-year leap about 10 yeah so that’s the thing right the further long out you go the less that you’re actually paying per day in time decay so um what scenario would it make sense to go for two or two and a half year leap you know it really comes down to the cost of the trade right so i think 10 is is a low estimate in terms of additional cost right so for example um uh the january 10 is four dollars and fifteen cents if you go out one for one more year that’s about 25 more so you know i tend to find that it costs about 25 more not 10 more in my in my experience um so you know you’re paying 25 more for one more year but generally speaking the longer term you go the uh the less per day you’re paying in in time decay but you know you are risking more capital uh what should be price width of elite called bought and short-term calls sold i’m not sure what you mean by price with of leap bought and short-term sold if you don’t mind clarifying that that would um i i can help you answer that question ryan asked a question can credit spreads make sense with leaps ryan no never ever sell credit spreads with leaps only sell credit spreads that about 45 days to expiration the reason that we we sell short dated options is because short dated options have accelerated time decay so if you sell a vertical long term vertical leap you have no time decay you only have basically delta exposure you have very little vega exposure and that is a detriment to the credit spread the credit spread really takes advantage of the short vega exposure that you get how do you understand if an option is liquid enough okay great question i mean this goes back to our liquidity spreadsheet that’s why we created the liquidity spreadsheet which is at the bottom of your options place screen when you click on the liquidity spreadsheet this will show you a list of stocks that are all very liquid um actually you know what i’ll show you this uh whoops hold on so if you click on that liquidity list you get this list of stocks that are very liquid and you can sort them based on liquidity but basically you can see which stocks are very liquid all the stocks here that are in this very liquid column which as you can see there’s a lot of them right now because the markets are pretty there’s almost 340 names that are very liquid so if you’re trading leap options on any of these 340 names you should have no problems getting in and out of those um those trades so for for your question how to understand the options liquidity this is really why we built the liquidity spreadsheet which again you can find at the bottom of your options point platform [Music] uh you know your question of you know robert your question about your ford position again i’m not here to provide personal investment advice on your positions uh if you want to send me an email i can take a look at it and provide best practices but again i can’t tell you you know what to do about your own personal positions william is saying for the poor men’s cover call i assume the short dated call has the same strike as a long day to call no not no because when you’re buying the long call you’re buying an in-the-money call when you’re selling a cover call you’re selling an out-of-the-money call so you can use the cover call report that we produce to determine the strike price that you want to sell but you’re always selling out of the money and you’re buying the in the money so they would not be the same strike price your questions about whether this option this webinar will be recorded all of our webinars are recorded we’ll always send you the link after we finish here do you recommend vertical calls to lower do i recommend vertical calls to lower the cost on leaps so again no you don’t want to turn the leap into a vertical you do want to turn the leap into a diagonal potentially by selling a short dated call but not a vertical can you do a same time that you do the leap also sell a leap again i think i answered that question multiple times no you do never ever want to sell a long term leap because there’s no time decay the whole point of selling an option is to capture time decay independent of the price of the leap at expiration can you still buy out of the money leaps and make profits of the stock moves up modestly uh and make profits and the stock moves up modestly um ian yeah the reality is that you can make money in any call option if the stock moves higher the question is just how fast does the stock need to move in order to make money if you buy an out of the money leap and again out of the money leaves there’s nothing wrong with it you’re just buying a lottery type ticket payoff grab versus a stock replacement so not suitable for long-term investing suitable for long-term speculating but not in my opinion for long-term investing what would be the profit when neo reaches 70.66 if succeed in selling the option well that’s what you can use options play for our p l simulator allows you to simulate what the profit of the options are once you hit a certain price so if you buy the january 40 let’s say you buy the 42 call option and you think the stock’s going to go to 70 uh whoops 70 you’re looking at a 47 return on your call option i’ve seen a strategy called milking the cow where a long leash where a long leap straddle or strangle is used to offset the risk of selling very short term straddle strangles on sp y and keep rolling every week or so is there merit to that patrick you’re gonna have to send me some more information about milking the cow i’m curious to see this but what you’re selling what you’re showing me you know being long elongated uh actually no i’m thinking about something else you’re gonna have to send me some some what is milking the cow i have to read a little bit more before i i comment on that um you know questions about whether this will be recorded on youtube all of our webinars are always recorded and posted on youtube uh okay aren’t wide spreads the result of miss price vol no it is not wide spreads are simply because something doesn’t trade very often and market makers are are asking for a a larger vig if you will and it really comes down to liquidity more than anything else nothing to do with vol or miss price vault uh mark thank you so much i appreciate it um would you do a leap with an option prior to quarterly earnings would you do a leap with option prior to quarterly earnings generally speaking i would say you know as a long-term investor you’re not as concerned about quarterly earnings as much or you’re not as sensitive to quarterly earnings as you are when you’re buying a short-dated option so patrick i mean it really depends on the specific scenario you’re talking about you’re going to have to give me a little bit more detail also if you have an 80 20 difference on calls and puts and leaps who is on the other s when buying a leap there’s always a market maker on all sides and calls and puts are completely separate so you know just because there’s a lot of volume and calls has nothing to do with the fact there’s a lack of volume inputs but it’s always a computer algorithm on the other side of every single one of your trades is it realistic to buy leaps for a debit spread again questions about vertical spreads and debit spreads with leaps never ever trade a vertical spread on the lead because the short dated option the short option you have no time decay in it you really you don’t have the benefit of that short option um okay with that you know that covers a lot of the questions here i really tried to get through as many as i possibly can but unfortunately i can’t get through all of them but i really tried to get through as many as possible so again i want to thank aurora for taking the time out here this afternoon thank you for sending me that article about milking the cow i’ll take a look at that when i get a chance here today so thank you so much everyone i hope you guys have a great trading day and i’ll see you guys tomorrow morning on our cyber security i’m really excited to put that together for you guys i’m still putting that together right now i’m really excited to share that with you and then uh next week we’ll be back here doing more market outlook sessions we’ll wrap up 2020 and we’re going to do one more rapid fire session here next friday before we break for the holidays so with that thank you so much have a great trading day and i’ll see you guysp