 LEAPS
One of the great advantages that options provide is
leverage. You can control a large holding in an asset for a
small amount of money. Since you participate in the gain
from the price movement of the underlying asset for a
fraction of the cost of the asset, you can significantly
increase your rate of return.
But be careful to avoid a common mistake. Make sure that
you buy enough time for the asset to make its move. Error
on the side of caution with this one. It can be tempting to
buy the cheap option with one or two months to expiration,
because you know the asset will make its move in a few days
or weeks. But the market is always full of surprises. It is
generally better to allow at least three or four months to
give yourself a margin of safety, in case your expected
move is delayed. The additional time doesn't cost that much
more (its not a linear function), but it reduces your risk
significantly.
As an option nears its expiration date, the time decay of
the option premium increases. The rate of decay is the
largest in the last month before expiration. Many option
traders exit their option positions prior to one month
before expiration so that time decay does not erode their
position so much.
You may want to consider LEAPs. They are Long-term Equity
AnticiPation Securities. A LEAP is just a long-term option
whose expiration is more than 9 months away. LEAPs always
expire in January and can usually be bought one, two, or
three years out.
Some people buy LEAPs in lieu of equity ownership, because
they can take advantage of long-term moves in an asset at a
fraction of the cost of owning the asset.
When you work with LEAPs, as with any option, it is
important to do appropriate analyses on your option
position before you open it. Determine fair value for the
option to make sure you don't pay too much for it. Don't
let your profits erode; make sure you get the right start.
It is also good to assess the actual probabilities of
reaching your goal. Don't rely on just a feeling. A good
options program like Option-Aid
can do all of these calculations for you and make it easy.
When you are analyzing options to maximize your profits,
it is very important to calculate fair
value for the option you are considering, so that you know
how much over fair value you are paying for the option and
determine how much risk you are really taking on.
Then it is especially important to have a good options
analysis program like Option-Aid. It can determine fair value for the options you are looking
at and calculate the probability of you making a profit or
taking a loss. If you pay too much for an option, the
underlying asset could move in the direction you predicted,
yet you might find your profits disappear as volatilities
moderate and option premiums return to more normal values.
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 Information is the Key to Increasing Your Wealth
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Related financial Sites:
Valuation of Company Options
Option Posting Service for Companies
Valuation of Employee Options
Forex Trading Resources
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