HOW TO BUY LEAP OPTIONS

In today's article, we shall see how you can purchase Leap options as a substitute for stock. Purchasing the leap calls and Trading Options can allow you to hold many shares with a little capital.

When you are purchasing long-term Calls, they are called "LEAPS". Leaps strategy can be best suitable for those who have started to trade with options and want success. The main purpose of buying long calls is to get the same profit you might have earned in the stock market, but you get the chance to limit the associated risk.

So, let us understand what Leap options are, and then we shall see further details. As described earlier, options contracts have a long expiration time known as Leaps. They are otherwise referred to as short versions of Long term anticipation securities. They are also a type of investment, like shares, debentures, bonds, currencies, etc.

The time to expire a Leap option is generally nine months. Please do not confuse them by quoting them with different names. Because their life is significantly high, they are considered Leaps.

How to get started with the LEAP options? Keep reading this section, as we will share how you can begin buying Leap options, what factors to consider while buying, and many other important things.

The first stage is to select the stock in which you are interested in investing. You don't need any calculations or strategies here in the selection, do it just like what you would have done for selecting the shares. Although, if you want to do research, you may utilize some online tools or software. The second stage is choosing the strike price. Please make sure you select an out-of-the-money price because here when we say in the money, it means the strike price is less than the current price, so you must choose out of the money as the strike price.

The rule of thumb that most traders apply is to look after the Delta value at the strike price. It would help if you kept in mind that the Delta value should be 0.80 or higher. Why 0.80, and what does it signify? If the delta value is 0.80 or above, your option's price will increase by 0.80 paise per every one rupee increase.

Now consider if your delta value is 0.90, then for every one rupee price rise, the price of the option will increase by 0.90.

For starting to enter into Stock Position, consider a minimum of 20% in the money stock price. For example, if the underlying stock price is ₹ 100, then you must buy the call options with a strike price of ₹80 or lower than that. To get the delta according to your wish, you need to lower the strike price from ₹80 and remember the market will be highly volatile. As you reach the higher delta value, your options will behave like a stock even if the markets keep fluctuating.

What must you take care of while entering into the leap options? Understand some of the below-listed points to avoid errors.

Though you have long-term instruments, they still last for a very limited duration. Suppose you have held the money till the expiration date, in this case, nine months, and just after the expiry, you see an increase in the price. So, this was a complete waste of money.

As the expiration dates start approaching, volatility is very high, and the option price may decrease constantly. You did not make any profit, so that is why selecting the time range is very crucial.

The third and last step after deciding the strike price and the duration is to select the number of Leap calls to buy. It is advised that you must trade options just as you trade shares. If you trade 100 shares, you must buy one call option (the options contract consists of 100 shares). If you are willing to trade on 200 shares, you must choose 2 Leap calls, and so on.

Note: If the options contracts expire worthlessly, you might lose the total amount invested.

Summary

So, by now, you must have had an idea about the leap calls Trading Options, how it works, and all. You must set a price at which you will feel satisfied by trading and exiting from that Stock Position. Another bonus tip here is if you observe that the underlying asset price is declining at a very fast speed, you may put a stop-loss there to auto exit and avoid yourself from going beyond the stop loss. Another little piece of advice, do not get soaked by greed. Stay calm and positive.

I hope you must have liked this article. If you have any questions, please write to us using the comment box below.