How To Invest In AMZN LEAPS Like A Pro: For Beginners

Summary

In this video, the creator educates beginners on trading LEAPS (Long-Term Equity Anticipation Securities) options. The video emphasizes key concepts such as selecting in-the-money options with long expiration dates, understanding Delta and Theta Decay, and picking stocks with a strong long-term outlook. The creator advises starting with safer strategies like covered calls and cash-secured puts before transitioning to LEAPS. They recommend limiting LEAPS to 5-10% of your portfolio due to their volatility. This approach aims to help traders minimize risk while leveraging the potential of long-term options.

Takeaways

• 😀 LEAPS (Long-Term Equity Anticipation Securities) options are a safer alternative to shorter-dated options because they have longer expiration periods, reducing the risk of Theta decay.
• 😀 LEAPS options give traders leverage by allowing them to control 100 shares of stock for a fraction of the price compared to buying the shares outright.
• 😀 Longer expiration dates (365+ days) are preferable for LEAPS options as they allow more time for the stock to move in your favor.
• 😀 In-the-money options are statistically favored because they have intrinsic value, which reduces the impact of Theta decay.
• 😀 The key to success with LEAPS options is selecting stocks with a long-term upward trend, which increases the probability of profitability.
• 😀 LEAPS options are typically more expensive than shorter-dated options, but they are generally less risky in terms of Theta decay.
• 😀 A good LEAPS strategy includes purchasing in-the-money options to reduce risk, rather than buying out-of-the-money options that are more speculative.
• 😀 When buying LEAPS, it’s important to balance risk by maintaining a diversified portfolio, with LEAPS representing a smaller portion (5-10%) of the total investment.
• 😀 LEAPS options can be used effectively alongside covered calls (selling shorter-dated calls on the same stock), which provides income and hedges the position.
• 😀 It’s important to start with long-term investments (like S&P 500 funds) before experimenting with more advanced options strategies, such as LEAPS, to build a solid foundation.
• 😀 As a beginner, it’s better to start with simpler strategies like covered calls or cash-secured puts (Level 1 options) before progressing to more complex strategies like LEAPS (Level 2 options).

Q & A

What are LEAPS options and how do they differ from short-term options?

LEAPS (Long-Term Equity Anticipation Securities) are options with expiration dates over a year away, unlike short-term options, which expire within a few months. LEAPS provide more time for the trade to work out and have less time decay than short-term options.

Why do people lose money trading options, according to the video?

People often lose money in options trading because they choose options with short expiration dates, buy out-of-the-money options, or select the wrong stocks. Short expiration dates lead to faster time decay, while out-of-the-money options can expire worthless.

What is Theta decay and how does it affect short-term options?

Theta decay refers to the loss of an option’s value as it approaches its expiration date. Short-term options are more susceptible to Theta decay because they have less time for the stock to move in the desired direction, making them riskier and prone to losing value quickly.

What is the advantage of buying in-the-money LEAPS options instead of out-of-the-money options?

In-the-money options have intrinsic value, meaning they are less affected by Theta decay and have a higher likelihood of retaining value as they approach expiration. Out-of-the-money options rely entirely on stock movement, making them riskier and more prone to losing value.

How can investors reduce the risk when trading LEAPS options?

To reduce risk, investors should focus on buying LEAPS options with longer expiration dates (at least 500-600 days), select stocks with strong growth potential, and choose in-the-money options that already have intrinsic value to avoid the pitfalls of Theta decay.

What is the role of Delta in selecting LEAPS options?

Delta measures how much an option’s price will change relative to a $1 change in the underlying stock’s price. A higher Delta (close to 80 or above) indicates that the option is more likely to retain its value and move in sync with the stock, reducing risk compared to lower Delta options.

Why is it important to choose stocks with strong fundamentals when trading LEAPS options?

Choosing stocks with strong fundamentals ensures the underlying stock has a good long-term growth trajectory, which increases the likelihood that the LEAPS options will succeed. Picking weak or volatile stocks increases the risk of losing money.

What does the speaker mean by ‘leveraged securities’ in the context of LEAPS options?

LEAPS options are considered leveraged securities because they allow traders to control a large number of shares with a relatively small initial investment. This leverage can amplify both gains and losses, making it important to carefully manage risk.

What percentage of a portfolio should be allocated to LEAPS options?

The speaker recommends limiting the amount of your portfolio allocated to LEAPS options to no more than 5-10%. Since these options are leveraged and can make the portfolio more volatile, it's important to keep exposure to them relatively low.

What are the benefits and drawbacks of using LEAPS options in a portfolio?

The benefits of using LEAPS options include lower risk due to longer expiration dates, leverage allowing control of more shares for a lower cost, and less time decay. The drawbacks are the higher upfront cost and the potential for significant losses if the underlying stock moves against the trader.