Don’t Buy Shares! Buy LEAPS Instead!

what's up guys welcome back so last week's video got amazing feedback it absolutely blew up breaking channel records all over the place views watch time you name it i am not entertained and one of the most exciting things for me as a creator when videos like that do so well is the comment section inside that comment section i got so many incredible questions comments and it just leads to more content like this it's kind of like a follow-up because i said something inside that video and in the comment section that really like sparked people's interest and that was the fact that i never really plan on buying 100 shares outright of a stock ever again now that statement alone made people be like what do you mean you're never gonna buy a hundred shares ever again and then i followed it up with and when you buy an option that sometimes the max loss is not the premium that you paid and that just made people's minds explode like it's pretty common like you know rule of thumb that we know that the max loss when you buy an option is a premium paid but that is not going to be the case in what i'm about to tell you if you believe that then you don't know the information i'm about to teach you and this is going to be like super valuable for you and the last wonderful thing is this is not going to be some next level ish that like you have to be like an options expert to understand you can literally do this tomorrow i explained this to a couple of people on my discord after last week's video and they already started making money they pretty much like oh thanks a lot brad i made back my discord my discord donation in one week yes that's exactly so you don't have to be like next level to understand what i'm going to show you today and why i'm never ever going to buy 100 shares outright ever again really unless there's like i guess i'll never say never all right there's a very very good chance that i am not going to be buying 100 shares of a stock ever again so really what i'm going to be talking about is a leaps in this video long term equity anticipation securities like i've seen so many videos about it and really with the exception of adam over in the money i've never really heard anybody explain it the right way right people just explain it as a really really long call option that's far out in expiration that's really really deep in the money but they never compared it to owning 100 shares of a stock and showing that owning 100 shares of stock versus leaps is really the same exact thing same exact leverage same exact position but you're going to get it at a fraction of the price so really show that guys you guys know that i've been loving the digital whiteboard showing you things visually i want to get down i want to show you guys i'm going to i'm going to show you an example like hear me out don't rush away from the video because you hate options or because oh my god this is so expensive but yes guys it costs money to invest in the stock market but like i said as you're going to see as opposed to 100 shares of owning a this is a basic stock as compared to compared to owning 100 shares this is going to be like half half the amount of money to do so and you're going to get the exact same benefits as owning the 100 shares i wish you guys knew really inside how excited i get when i'm about to show this because i know that i'm going to help so many people okay this is starbucks right here guys and as we can see we are going to be buying a call option so yes we are going to have to pay some premium but that premium is not going to be our max loss our max loss is actually going to be defined there's going to be if no if ands or buts about it when you enter this contract you are going to know exactly what the worst case scenario is and as you can see expiration guys january 20th 2023 exactly two years from today i know it leaps right we want to go more than a year but the further we go out the better because we don't want to have to worry like i said we want this to replicate only 100 shares so we don't want to be worrying about things like expiration and we pretty much can it's safe to assume that this is going to go up over the price of two years like we're definitely going to choose a stock we think is going to go up over the course of two years that's like i don't know options 101 you want the stock price to go up if you're going to be buying a car so there's a couple things here that i'm i'm really going to reference and focus on one is going to be the current share price which is 105.75 next is going to be the strike price that i've chosen as you can see this is deep deep deep in the money and yes that is going to increase the premium that we need to put up but if you know a little bit about intrinsic versus extrinsic value which i will refresh you'll understand why it's more money it has to be for going deeper in the money over here is going to be the premium so this is in premium term so essentially what we are going to have to put up is what 5 598 that is going to be our upfront cost for this option over the next two years but here guys delta right delta is pretty much it's one it's the likelihood that this that this particular option is going to expire in the money right a pretty rough estimate so this is a 97 chance of finishing at 2023 in the money but it also is a good indicator of pretty much the amount of shares it's you know how many shares this kind of represents so here 97 which is damn close to 100. we're going to get all the benefits of 100 but really 97 and i want to that's those things we're gonna compare we can mention the fact that data is almost nothing but we understand that because we are so far to expiration so i said it a few times now let's break it down the fact that even though you're putting up 5 598 that is not going to be your max loss as compared to owning 100 shares i'll explain would you like me to explain first i'm going to do is i'm going to write the premium here the premium is going to be 55. and 98 cents and we just explained that in terms of dollar amount that's really 5 598 now guys if you don't know that this premium is split into two things intrinsic value and extrinsic value and we are going to see throughout this video that this right here is going to be our max loss as compared to only 100 shares of the same exact stock at this share price now the intrinsic value the amount of money that if you were to exercise right now this is the profit you get it's essentially how far in the money this option is so right now we can calculate that intrinsic value very very easily all we have to do is we take the share price 105 and 70 cents and we minus it from the strike price so that gives us an iv that's equal to 55 dollars and 70 cents so of that 55.98 that we're putting on premium 55.70 of that is intrinsic value that's profit that we can get if we were to get in and write out and close it that's the profit we get right back so even though we're putting up that money that's essentially ours we could get that back right now if we were to close this option the intrinsic value is how much you can exercise right now in the profit that you'd receive now the extrinsic is everything else which we see is just 28 cents or 28 guys this is really our max loss inside this option and i'm gonna show you we can even mitigate that to almost nothing okay so let's assess the risk okay because i know everyone's always worried about the risk when it comes to options if i own 100 shares and i own them at the strike price of 105 and 70 cents and it dips and it dives to our strike of 55 so now it's 50 how much did we just lose well we just lost 55 dollars and 70 cents we would lose the intrinsic value this is what we would lose if we owned 100 shares of the stock and it dove from the current share price all the way down to 50 now in this leaps how much what's the risk what would we really lose well for the leaps at expiration the intrinsic value is going to be equal to zero dollars the extrinsic value is also going to be equal to zero dollars so really it's just a premium that we put up 55.98 the only difference between owning 100 shares and it dipping to 50 and owning the leaps and dipping to 50 is 28 or this extrinsic value the only difference between only leaves and owning 100 shares if it dips to 50 is our strengths of value just what i've been saying it's 28 but there's a butt there's there's a butt if this were to continue down below 50 we would still only lose this right when we own that leaves after it goes worthless that's that's that's capped our loss but this if we own 100 shares it could essentially go down to zero if this went down from 50 down to zero we'd lose another five grand so there's more risk essentially there's a lot more downside risk to owning the 100 shares and it gets even better it gets even better this is the part of the video in abs video where he started to like lose his mind i'm gonna link his video down below it's really really good and he has a much different approach than me let's look at the difference in cost basis right so let's see cost basis if i want to own 100 shares of this if i want to purchases 100 shares right it's going to be the share price times 100 that's going to be a cost to own 100 shares of 10 570 that is a ton of coin but what's our leaps cost basis once again just a premium that we put up so by owning the leaps with more downside protection and less money and only risking 28 dollars more to do so we are going to save a difference of 4972 dollars so you're getting all the benefits essentially of holding 100 shares and you're going to save yourself 4 972 that you can now go use to try and make up this 28 over the cost of two years until 2023. you think you could do that do you think if i gave you five grand you could figure out a way to make 28 i mean what percent return would that be so let's see if we took this 28 and i divided by the difference in the cost basis that is going to be a 0.56 percent return do you think if i gave you 5 grand in the next two years you could get a return of 0.56 because if you think you can it is once again better to own this leaps than to purchase 100 shares outright and for those that really have a firm grasp on extrinsic value you know that this is the max this 28 only exists at expiration up until expiration it's going to be less than 28 because you'll probably be able to recuperate some of that extrinsic value if you were to sell to close this option you can see guys this is not crazy it blows my mind when people just push off options they're like it's too risky it's too expensive i could lose all my premium like look guys it's just math and how did all this relate to the other video guys the one last thing about this leaps if you did not happen to see that video i'll definitely link in the comments go back and see like i said 20 000 views in one week which is unheard of for my channel when you own this all right and you have level three enabled options so people ask me this like oh brad i can't do this from the video you have to ask your brokerage you know you have to be allowed to use options and this is essentially going to be a form of a spread which i'm about to tell you so if you're in robin hood i think it's level three i don't know what it is for everything else but you have to be able to trade spreads because if you have a leaps that's out for 2023 when i make mine guys i don't usually even go to nine seven i'll i'll go to like seven that's point seven delta is okay for me for my leaps going out that far but essentially what i could do is now sell covered calls against this that's called the poor man's covered call and i could promise you in that one covered call i'm gonna make this intrinsic value back right there so literally in one covered call i am going to make back that assume and if you don't know what that is like i said go back i did that's what that last video was on the poor man's covered call i've been racking my brain to try and figure out some cons if it's a dividend stock right in this you're not going to be collecting the dividends okay so maybe if this was like a dividend hold maybe this wouldn't be the best play but like i said i'm not saying that i'm not going to own 100 shares i said i'm not just going to go out and buy 100 shares right i dollar cost average my portfolio is 100 shares of things that i'm selling calls against i'm saying like going into robin hood or going into my brokerage going into vanguard and saying today i'm going to purchase 100 shares never going to do it again i'm just going to do this and after i do it i'm going to sell calls against it i'm going to collect premium which is going to lower my net premium paid which is going to get me closer and lower my break even like guys the pros are amazing as long as you really understand that the most you can lose as opposed to owning 100 shares of the exact same stock is just the extrinsic value you're golden people also asked me last week if i could open some more premium spots i opened 25 i think there's probably like 10 left if you want to get into the discord guys this is the stuff we're talking about every single day right you will make back your patreon donation i promise you you will get that back actually i'm not going to promise i can't promise you are going to get that that premium back most likely i'll leave a link down for the discord and patreon down below if you want to join that conversation if you haven't gotten the four free shares i know you've heard about it from weeble you know get the four fair shares and then take the money out whatever it's free it's for free shares it's like at least 20 i'll leave that link and guys get down in the comments below leave me some more future content that you want me to do just like this if you want me to explain anything i'd be glad to do so and until i see you guys in the next one stay positive work really really hard always please be kind to other people hope you have yourself an amazing day and an even better tomorrow

Channel: Brad Finn

Views: 130,207

Rating: 4.8934889 out of 5

Keywords: Brad Finn, dividend investing, dividends, passive income, the wheel strategy, stocks, trending stocks, LEAPS, buying options, poor mans covered call, LEAPS options, in the money options, options premium, max loss when buying an option, trading options, trading options on robinhood, how to trade a LEAP, how to trade LEAPS, how to do a poor mans covered call, inthemoney

Id: P2QpK6waKBk

Length: 13min 26sec (806 seconds)

Published: Thu Jan 21 2021