Options can be complicated to understand and options strategies even more so. This shouldn't hold you back from utilizing the power of options in your portfolio. Here, I'm going to break it down into a simple trade. Apple stock versus Apple options in 2019.
First, let's discuss options. Options give investor the right to buy a certain stock at a certain price, not matter where it trades in the future. In the example below, investors are going to buy an Apple option for $1900 that give them the option to buy Apple stock at $160 per share for a year, even if it would go to $1,000 per share. The price and duration of the option is set when it is bought.
Now to the stock.
Calendar year 2019 was a good year for Apple stock investors. At the beginning of the eyar, one Apple share was trading for $157.92. This means that investors who bought 100 shares of Apple at the beginning of the year had to spend $15,792 on those shares.This is a pretty common investment.
At the end of the year, those same 100 shares were worth $13,573 more than they were at the beginning of the year, for a total return of 86%. This was a blockbuster year for Apple, for sure. Apple is a staple investment of Stock PRO.
Now to the options.
One of the best and often overlooked options strategies is one of the simplest of all strategies called a LEAP. A LEAP is a long-term option contract that expires in a year or more and it's used to replicate a stock position for much less money. The trade is simple: buy a single call option.
At the beginning of 2019, the cost of 1 Apple LEAP was $1900. This would have allowed an investor to buy Apple stock at $160 per share for 380 days.If the stock goes up, then obviously the value of the option contract will go up as well.
Because of Apple's rapid rise during the year - at the end of the year, this 1 Apple LEAP was worth $11,482.50 for a total return of over 600%.
A $1900 investment in Apple options returned almost as much as a $15,792 investment in the stock during the course of 1 year.
Obviously, it doesn't always work out that way. If Apple didn't go up at all during the year, the option would have decreased in value and possibly gone to $0. This is the main risk of options is they expire, eventually. But, the initial investment into options is much, much less than individual stocks so that risk is somewhat offset.
Investors can buy or sell options everyday on almost every stock. There's no reason to not include options in a portfolio and there's every reason in the world to include them.
Options PRO is a complete portfolio of options strategies.
Contact us to learn more about options or to invest Options PRO.