There are several ways to reduce the risk of purchasing stock; this is done by combining them with other options. However, the particular method this article talks about involves purchasing LEAP calls instead of shares of stock. No investor or trader can claim to produce profits 100 percent of the time. However, being right more often than being wrong will allow you to profit consistently and grow your portfolio.
Buying shares in any company is always going to contain an element of market risk, whether defined in terms of price and timing or in terms of long-term fundamental analysis. Using LEAP calls with up to three years until expiration, the short-term problems of technical market risk and timing can be mitigated. The trader is much safver in choosing 15 stocks and purchasing 15 LEAP calls at 10 each, than purchasing $15,000 in shares.
The result is safer as well; you will exercise only those LEAP calls whose current share price is higher than the locked-in strike price of the calls. While this may not necessarily transpire in all 15 stocks; you only need four or five winners to make a profit on the strategy.
It is true that buying short-term calls can be a high-risk strategy if not done properly; however, it is a bit different when employing LEAP options. This does not mean that it is always prudent to invest your money into LEAP calls because there are certain times in the overall market where it simply does not make sense.
For instance, when the market is overbought and prices are inflated across a broad market, purchasing LEAP calls would be a devastating choice, even to the point that you would not be able to recover your investment for years. The slow recovery of price following a market tumble, aggravated by the problem of declining time value, would make even long-term options incorrect horrible choice.
In general, to ensure that the trader does not miss the opportunities for stocks whose prices are going to climb, LEAP calls are a terrific alternative to the risk of buying stock. To avoid the risk of poor timing in equities whose price ends up depressed over the coming months and years, using the LEAPS calls will prevents you from losing value in large segments of your portfolio.
Every trader wants the best of both worlds; excellent short-term timing to avoid technical market risk, with accurate selection of stocks that take advantage of long-term fundamental growth. This is where the use of LEAP calls to leverage your portfolio expands opportunities while facilitating the trader s ability to manage those risks.
For more information, be sure to visit our stock software review site