Buy LEAPS vs stocks

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n00b_to_investing
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Buy LEAPS vs stocks

Post by n00b_to_investing » Wed Jun 13, 2018 9:11 am

curious to hear your opinion if buying long term options is worthwhile option in stocks you would want to hold for a year or two

e.g., one could buy a Jan 2020 call options on NFLX for $40 each; where as buying 100 shares in NFLX at ~ $375 ... so with options you could effectively hold NFLX for 1/10 cost.

Only diff i see is that option could theoretically expire worthless sooner than a stock going to 0.

123
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Re: Buy LEAPS vs stocks

Post by 123 » Wed Jun 13, 2018 9:27 am

Sometimes I've bought LEAPS on stocks as a novelty with a small portion of my "play money". I don't think I've ever paid more than $2 a share for them. I always bought the most far out LEAP available. They can be a cheap way to be involved in individual issues without risking a whole lot, though they can expire worthless. The time pressure of a LEAP, in terms of a performance deadline, adds a little sizzle instead of just holding the equity itself.
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deltaneutral83
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Re: Buy LEAPS vs stocks

Post by deltaneutral83 » Wed Jun 13, 2018 9:57 am

n00b_to_investing wrote:
Wed Jun 13, 2018 9:11 am
curious to hear your opinion if buying long term options is worthwhile option in stocks you would want to hold for a year or two

e.g., one could buy a Jan 2020 call options on NFLX for $40 each; where as buying 100 shares in NFLX at ~ $375 ... so with options you could effectively hold NFLX for 1/10 cost.

Only diff i see is that option could theoretically expire worthless sooner than a stock going to 0.
You never mentioned the strike price of the underlying (NFLX) and just threw a number out for cost of said option, $40? I assume you mean at the money ($370ish). Given that, Jan 2020 is a lot more than $40, more like $80. So you need NFLX to rise 21% in 19 months just to break even. Good luck.

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David Jay
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Re: Buy LEAPS vs stocks

Post by David Jay » Wed Jun 13, 2018 10:00 am

n00b_to_investing wrote:
Wed Jun 13, 2018 9:11 am
curious to hear your opinion if buying long term options is worthwhile option in stocks you would want to hold for a year or two
It is hard to say if it is worthwhile without knowing your goals. Are you trying to hedge?

It is unlikely that you will consistently outperform stock holdings with options (including LEAPs) over the long term because of the costs involved. Covered calls can make sense in some situations, so again we need to know your goals.
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lack_ey
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Re: Buy LEAPS vs stocks

Post by lack_ey » Wed Jun 13, 2018 10:03 am

So what is the actual objective? Do you effectively just want leverage on the underlying asset, or is it the specific return profile of the option (relative to the underlying stock, and which changes over time) that you're interested in? As a hedge, speculation, part of a larger trade, or what? Depending on what you want, you may want a very different strike price, maturity, etc. and want to trade or even hedge the position to get the right exposure in the end.

Generally taking bets on single stocks is not that useful unless you actually know something. Increasing risk is not really that special in of itself. For common stock indexes, probably it's more efficient and clean with respect to asset exposure to use futures rather than options if you want leverage.

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packer16
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Re: Buy LEAPS vs stocks

Post by packer16 » Wed Jun 13, 2018 4:35 pm

LEAPs appear to be easier than they are. You need to get 2 thing right the mispricing & the timing when the market will correct this. If you are good you may be able to get the mispricing right more than 50% or 55% of the time but in my experience the timing aspect of LEAPs lowers the odds of success considerably due to the timing aspect of the bet which IMO is impossible to know & is more a function of luck than skill. Where this makes sense is if you know something is going to be resolved by a specific date or there are other factors like high short interest that drive down the time value premiums on options so you are getting a cheap option.

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Pajamas
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Re: Buy LEAPS vs stocks

Post by Pajamas » Wed Jun 13, 2018 4:39 pm

Problem is that January 2020 is only 18 months from now. That's not really long term, perhaps the short end of medium term.

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whodidntante
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Re: Buy LEAPS vs stocks

Post by whodidntante » Wed Jun 13, 2018 6:13 pm

Unless you are doing one of the things options are good for, just buy the stock.

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