I have been asked why I am buying Alphabet LEAPS CALL option with a high strike price and low delta. A low delta means a low premium price increase/ decrease with the corresponding share price movement.
There are a few reasons why I choose a low delta for my LEAPS options.
Lower Delta, Lower Premium
The biggest reason is that the lower the delta, the lower the premium. For an expensive stock like Alphabet, a high delta will mean I am paying close to full price of owning 100 units of shares per contract, i.e each LEAPS contract can cost almost USD$280,000. That is way out of my trading budget.
Buying More Contracts
When I invest a lower premium for each contract, I give myself the flexibility to buy more contracts as well as sell and take profits when the share price rises. E.g. using a capital of $50,000, I can either buy one LEAPS contract at a high delta or 5 LEAPS contracts at a lower delta. And when the share prices, I can sell off 2 contracts and wait to see if the share price will increase further, thus allowing me to bag a bigger overall gain for my investment.
Slower Rate Of Premium Falling
Furthermore, if the trend works against me, i.e.share price keeps falling, the rate of decrease in premium price will be lower due to a lower delta, as compared to a contract with high delta.
When the share price drops, so does the premium of the LEAPS. With a lower premium paid, it will be easier to average down as compared to paying a high premium upfront for an ITM LEAPS. When I first started on LEAPS, I took the advice of the “options expert” and bought many ITM LEAPS. When the share price dropped, I got stuck with a significant drop in premium (delta) and a larger capital to average down. Even if I do managed to average down, I am still left with high average price.
Using my LEAPS growth formula, the expected % growth of premium price relative to a % share price gain will be higher as the denominator of the equation is the premium price, i.e lower the denominator, the higher the expected growth.
Making Money When Share Price Rises
Lastly, while a low delta may mean that the chance of hitting strike price is lower (on expiration date), it does not mean that I make money only when the strike price is achieved. The strike price can be far ahead but as long as the share price has risen significantly above my buy price (but still nowhere near the strike price), my premium price would have increased and I can sell off the contract to earn a profit.
I hope this strategy helps friends who stay off LEAPS because of the high premium, especially for the big Tech stocks, which I buy extensively for my LEAPS contracts. You can read my guiding principles and the risks of buying LEAPS articles to help you make a better decision when it comes to buying LEAPS.
Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading
The LEAPS Strategy has helped me make more than USD120,000 in 2021. Here’s all you need to know about this strategy that can help you increase your wealth exponentially:
The Ultimate LEAPS Options Thread
Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts behind executing these trades:
Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)
I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day
I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sensing of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021
This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months