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FFO Options 13: Buying Stock At Quarter Price Or Less

FFO Options 13: Buying Stock At Quarter Price Or Less. Dr. Scott Brown Stock Options. Deep-In-The-Money (DITM) Call Options. This strategy provides a incredible way to buy a stock at 50% or more off the current price while taking on half as much risk.

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FFO Options 13: Buying Stock At Quarter Price Or Less

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  1. FFO Options 13: Buying Stock At Quarter Price Or Less Dr. Scott Brown Stock Options

  2. Deep-In-The-Money (DITM) Call Options • This strategy provides a incredible way to buy a stock at 50% or more off the current price while taking on half as much risk. • This is the best way to buy into the stock market, no matter if you purchase an individual stock or play on the market as a whole.

  3. Deep-In-The-Money (DITM) Call Options • The main advantages of using (DITM) are: • It allows you to spend less cash up front. • You will have less downside risk. • You will participate of all the same movement as you would if you owned the stock outright.

  4. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) • Most investors opt to purchase the cheap (OTM) call options that have short life expectancies. This type of options has its drawbacks: • The probability of paying off is minimum. • Short time frame to obtain the potential benefits.

  5. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) • OMT options have their strike prices well above the current price of the stock. • For Instance, the Microsoft Stock (MSFT) is trading for $25. You think it might go up to $30 over the next 3 months and you buy some 30 call options on it. This call will be $5 out-of-the-money. This three-month option can usually cost $.10 per option contract, which means your break even point is $30.10.

  6. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) Regarding to the prior example, you can control 100 shares of stock by paying just $10, which is very attractive. However this option has less than 10% chance of ever reaching your break even point ($30.10) by expiration.

  7. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) The figure below is a probability calculator for the (MFST) three-months $30 call. The table give us an idea of how low (high) are our chances of reaching a desired level. As we can see, the probability of reaching the break even point by expiration is just 7%.

  8. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) The previous data does not mean we won’t be successful with (OTM) options but the chances are very low. 8.10% probability just get us to our break even: no profits occur at that level. The probability of making profits on this investment are even lower.

  9. Why (DITM) calls are better than Out-Of-The- Money Call Options (OTM) • When you buy (OTM) options you will not be fully participating in the stock’s movement for the following reason: • Since you bought a very cheap option, the price won’t move in lockstep with the stock. Delta tell us how much the option price should move in relation to how much the stock moves. A 90-day option like the $30 call will have an initial Delta of maybe 10%. That means the option will gain about $.10 for every dollar the stock moves. However the stockholders fully participate on this movement.

  10. Why you are better off buying (DITM) than the underlying stock? • If done correctly, buying a call option is superior to buying the stock outright: • It cost less • There is less downside risk • When buying (DITM) options you could pay about half the price of the stock value and end up with the same result with less risk.

  11. Why you are better off buying (DITM) than the underlying stock? • The benefits with (DITM) options are amazing. You are going to get the same movement as if you have bought the stock. • When buying a stock you want movement in an upward direction, (DITM) strategy gives you that movement (high Delta) with less of an up-front cost.

  12. Why you are better off buying (DITM) than the underlying stock? The option calculator above illustrates the benefits with (DITM). If you buy a (DITM) option of MSFT for $11.31 when the stock price is $22.89, the strike price is $12 and 247 days to expiration, your Delta will be almost 100% (.9990). If the stock price rises by $.50 your option will be worth about $11.81.

  13. Why you are better off buying (DITM) than the underlying stock? The 100% Delta movement that we can get with (DITM) strategy tell us that the option will move in lockstep with the stock price.

  14. Buying (DITM) options VS Buying the stock outright The figure below is a visual breakdown of the profit/loss (P/L) scenario of the DITM strategy versus buying the stock outright.

  15. Choosing The Strike Price If your have the funds, you should always use the deepest in-the-money call option that has a delta of at least 90%. Or you can just use the lowest strike price listed by the exchange. The reason for doing this is because the particular option will have the highest delta and the closest breakeven price to that of the stock.

  16. The Probabilities (DITM) • The probability calculator above shows that your chances of reaching the breakeven price by expiration with a $12 call of MSFT are about 43.21 • This results confirm that with DITM options we have higher chances than with OTM options.

  17. Buying The Whole Market Another benefit about DITM strategy is that it can also work with a position in the market as a whole, as in the case of an S&P 500 index fund. This way you can diversify your investment in addition to or in lieu of just one specific stock.

  18. Expiration Action? • Four Possibilities: • The option will expire worthless. • Sell the option before the expiration. • There are no rules governing how long you have to hold the option. • Roll option to a later date. • Sell the original option, and purchase a DITM option. • Exercise the call. • You must make sure you have the funds to pay the balance on each of the contracts bought.

  19. Risk Management • Everyone should have a risk management plan regardless of the securities you own. • On an option contract, if you feel uncomfortable in the position, you should unwind the trade. • You should use the method that works for you best. • Ex.: Stop loss order, Percentage Stop, or Time Stop.

  20. Drawbacks? • You do not receive dividends that companies pay on their stock. • You do not have voting rights for any specific company. • Limited life span on the option. • Using DITM LEAPS gives the option time to mature.

  21. Disclaimer • DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS.  In our opinion, we believe, it may be possible, that heavy smoking and drinking may be hazardous to your health.  If you choose to smoke and drink while trading, The Delano Max Wealth Institute nor Dr. Scott Brown is liable for any damage it may cause.  If you slip and fall on the ice, we're not liable for that either.

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