Options

You don’t have to buy Apple at $200 a pop…

By Lee Lowell  |  August 9, 2018

I no longer buy stocks.

Why?

Because I can achieve everything I want in the stock market by using options contracts instead.

How?

Well, I’m going to show you how I could save $15,622 when buying 100 shares of Apple (Nasdaq: AAPL).

Now that AAPL has crossed $1 trillion market capitalization and the share price is near $209.07, it’s far too pricey for many average investors – a 100-share purchase would cost you $20,907.

Thing is, you could control the same position by using an option strategy that would only cost $5,285.

That’s a savings of $15,622 – a 74.7% discount compared to buying the shares outright.

Here’s how it works.

I can purchase a long-term (10-12 months) deep-in-the-money (DITM) call option for $52.85 per contract.

Since options contracts trade in multiples of 100 shares, multiplying $52.85 x 100 would yield the full-dollar cost of $5,285.

Now that I can buy the DITM call option, what does it do for me?

Well, in addition to saving $15,622 versus buying the stock outright, it also offers 74.7% less downside risk.

If Apple goes bankrupt, I couldn’t lose more than $5,285. Investors on the hook for the same number of shares would lose $20,907.

You’d also sleep better at night, knowing you have so much less at risk.

But one of the best features of buying the DITM call option is taking advantage of the 90% (or better) delta that it’ll have.

In option lingo, the delta gives a clue about how much the option price will change with any corresponding change in the stock price.

In this case, the DITM call option will move with a roughly 90% correlation to the underlying stock.

That’s called “getting bang for your buck.” And that’s why you should always aim to buy options with a 90% or higher delta.

Why?

Because who wants an investment that’s not going to move?

When you buy an option with at least a 90% delta, you’re assured that its price will move almost in lockstep with the stock.

If AAPL gains $5 per share, the DITM call option should go up by at least $4.50 per contract ($5 x the 0.90 Delta).

The DITM call option is essentially a surrogate for the stock. It’s offering all the same upside potential for 74.7% less cost and risk. It’s incredible!

But how do you really know the option price will react the way it should?

You can check a simple option calculator. Here’s one that I particularly like.

By simply bumping up AAPL’s price by $5 per share from $209.07 to $214.07, the DITM call would be worth roughly $57.35 per contract. That’s a $4.50 per contract increase – just as the delta predicted.

When you buy a DITM call option, you choose the expiration date. As I mentioned, it’s best to go long term.

At the end of the line, the option can either be cashed out, exercised, or rolled to another long-term option trade.

You can theoretically continue this trade for years on end, gaining all the same benefits that I just described.

If this trade sounds somewhat familiar, you’re right!

It’s my go-to option strategy when I want to buy a stock. I call it my deep-in-the-money (DITM) trade, and I’ve written about here and here.

Forget about buying stocks. Buy DITM call options instead.

Your wallet will thank you for it, and you’ll sleep better at night.

Lee Lowell

A former Wall Street insider and floor trader, Lee Lowell has worked in the market for nearly 30 years now. He began his option trading career in 1991on the floor of the New York Mercantile Exchange (NYMEX) in New York City.MORE FROM AUTHOR