General Options Understanding
If you want to buy options, it should typically be used in a non-binary setting. The probabilities should be in your favor. Depending on your time-frame, the strike, and expiration you choose can vary greatly.
For instance, the closer the option week expiration you select, the more in the money you want the option to be. You do not want to pay for time decay. You are looking for an option that will mimic the stock price around 90delta. This is where I will get some scoffs. Most people do not understand the concept of leverage. It is understandable given that media outlets tend to emphasize on returns. (See also: Apple Services: A Giant Is Growing Within Apple Inc).
When you buy an option, you are not trying to leverage returns. You are trying to leverage shares. For instance, paying 500 dollars to control 100 shares is better than dishing out 10000 dollars for 100 shares. If the stock moves up 50 cents to 1 dollar you have made 10 to 20% on your money versus 0.5% to 1. That is the power of leverage. That is how leverage is supposed to be used. Not the gambling way it is preached.
When the options experts talk of making 100% or more for returns, I wonder how they aren’t fired. Those types of returns are unexpected but pretty exciting when they happen. It is extremely rare. Markets tend to range about 70% of the time and have a slow crawl upward. If you look at the price chart of Apple Inc. (NASDAQ:AAPL), you will notice that the stock does not have extreme moves. Thus, the gigantic returns are a pretty unreasonable expectation.
Purchase Stock Or Buy The Option
If you want to purchase the stock for a long-term holding, then ignore the earnings announcement. The reaction will do nothing except give you more headache. Though I am not a fan of Buffett, I do like his simplicity. Just read Apple’s 10-ks. You do not have to even invest in Apple stock if you do not understand the company. Invest in something else if it makes sense to you. You should not be focused solely on returns.
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The article An Option Strategy To Play Apple Inc. (AAPL) Earnings originally appeared on amigobulls.com. Watch our analysis video on AAPL
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Additional Links:
(1) http://seekingalpha.com/earnings/earnings-analysis?ref=il
(2) https://www.amazon.com/McMillan-Options-Lawrence-G/dp/0471678759?ref=il
(3) http://amigobulls.com/stocks-to-buy/top-tech-stocks/?ref=il&ref=im
