Stock exchange strategy for buying long- term options
It can wipe out your entire portfolio in a matter of days when it's used foolishly. Used wisely, however, it can be a powerful tool that allows you to leverage your investment returns without borrowing money on margin.
What is best strategy for option trading? All About Options Strategy Options provide 3 key benefits - increased cost efficiency, potential to deliver better returns and act as a strategic alternative.
LEAPS are long-term exchange-traded options with an expiration period of up to three years. You're convinced that XYZ will be substantially higher within a year or two, so you want to invest your money in the stock.
You have three options. Buying on margin involves borrowing money from your broker to do so and pledging your shares as collateral for the loan.
Options Trading Tips: Ten Things I Wish I Knew Before I Started Trading Options
It might sound convenient, but you could ultimately lose more money than you've invested. But you could be forced to sell at a loss if you get a margin call, the stock crashes, and you can't come up with funds from another source to deposit into your account.
You'll also have to pay interest for the privilege of borrowing that money on margin.
You must pay a fee, or premium, for this option. The call options are also sold in contracts of shares each. You could call your broker and close out your position if the stock does rise substantially.
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You turned a Your risk was certainly increased, but you were compensated for it, given the potential for outsized returns. You would have received cash dividends during your holding period, but you would have been forced to pay interest on the margin you borrowed from your broker.
It's also possible that you could have been subject to the margin call if the market tanked. You might also be tempted to take on more time risk by choosing less expensive, shorter-duration options that are no longer considered LEAPS.
The temptation is fueled by the extraordinarily rare instances where a speculator has made an absolute mint. The Balance does not provide tax, investment, or financial services, and advice.
Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
By Sham Gad Updated Jul 8, If there is one lesson that investors should learn from market history over the past several decades, it is that the best time to buy stocks is when the market is tanking. Unfortunately, very few have the conviction to buy in the middle of a wave of panic selling. If making a complete commitment to buy is not in the cards for you, then one option strategy—selling puts—provides an alternative. Selling puts may actually be easier for the individual investor to stomach.
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