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Hi Leverage can be accomplished here in several ways. 1st lets talk about leverage ... Leverage magnifies gains ... AND ... magnifies losses.... All leverage really means is investing in something without putting your own money into it .... The most common example is borrowing from someone else to invest ... If you have a brokerage account you can do that with margin.... (a Margin account is simply a brokerage account that lets you borrow money to invest with) .....
The math is simple ... If I invest $100 and make $10 - I just made 10% ... I I borrow $90 and invest $10 of my own money and and make $10 - I just made 100% (I invest $10 of my own money and made $10 ... that 100% return on MY money) ... Now, I do have to pay back the $90 over time ... but I have really leveraged ... My return drops a little because I have to pay that back over time BUT it's still MUCH higher by using OPM (Other People's money)... That's the effect of leverage, (on the PLUS side)
What if the investment LOSES money NOW not only have I lost my own money..., but I still have to pay back the loan .... SO ... My LOSS is magnified, Just as the Gain was maximized
What are the ways to do that?
(1) Margin lending in a brokerage account (Just remember that if the investment you make loses money ... at some point .... you will get what's called a margin call - typically when your investments can't even hold 50% of the true value
(2) Borrow the money from someone else .. a bank, etc. ... at least this way, you won't have to come up with a certain amount of money just because the investment has lost a certain amount ... and for long term investments, tat do eventually come back, that may be OK
(3) Another way is options ... an option is a contract to buy or sell at a certain price. Walmart is an about 78 right now .... If you think WMT is going up ... you might but an option to buy (a call) at 85 ... by a certain date ... and lets say that Wal Mart goes up to 100 ... you can exercise your call option for a small amount of money, immediately buy Walmart at 85, and turn around and sell immediately at 100. (What do you have to lose? .... only the cost of the options contract) Remember the cost of an option (a right to buy or sell at a future price) is only a small percentage of the price to actually buy or sell the stock ... so again LEVERAGE
There are several benefits to buying stock options as opposed to buying the stock outright. They are relatively inexpensive, particularly when compared to the cost of the underlying instrument. For instance, you might be able to buy stock in XYX Corp. for $1000 per share. Stock is commonly traded in blocks of 100, so you would spend $10,000 for this position.
You can control the same amount of stock for a fraction of that price by buying an option instead. The options might be listed for 8 points. So by purchasing options, you will spend $800 instead of $10,000 to control 100 shares. (Stock options are for 100 shares, so $8 X 100 shares gives you the price of $800, not including your commission.)
So options, are a way to use leverage without the risk of actually buying those shares with someone else's money.... If things don't go the way you think they will ...you don't actually pay back the money, you just lose the small cost of the option (the contract that would have let you sell above the market price or buy below it)
I would recommend options, rather than margin or other borrowing. ... less risk with ALMOST as much leverage
Hope this helps
In exchange for the right to buy ("call") or sell ("put") an underlying security on or before the expiration date, the purchaser of an option pays a premium. The price of the contract is known as the debit, and it is the purchaser's maximum risk. On the other side of the trade, the seller of the option receives the premium as a credit to his/her brokerage account, but is obligated to buy (in the case of a short put) or sell (in the instance of a short call) the underlying shares if the purchaser exercises the contract. Brokerages hold cash from the premium as a guarantee against short positions.
The strike price, or exercise price, of an option determines whether that contract is in the money, at the money, or out of the money. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in the money because the holder of the call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the market. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in the money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive in the market. The converse of in the money is, not surprisingly, out of the money. If the strike price equals the current market price, the option is said to be at the money.
The premium of an option has two components, intrinsic value and time value.
Intrinsic value describes the amount the stock price is above the strike price (for calls), or below the strike price (for puts). Therefore the amount by which an option is in the money is intrinsic value. It is also the value of the contract at expiration.
Time value is defined as the option premium minus the intrinsic value. It is the amount that you pay for the possibility that it will be worth more in the future. Therefore an at-the money or out-of-the-money option has no intrinsic value and only time value.
Intrinsic value is only affected by moves in the underlying security.
Time value is subject to several factors, primarily time to expiration and implied volatility. Implied volatility is the market's expectation of the future volatility of the underlying stock. It is derived from the option price itself, and represents demand for the option. The higher the implied volatility, the more expectation that the underlying stock will make big moves, increasing the option's chances of being in the money. This also means that the option's premiums (that is, its time value) are higher. However, the value of time decays as expiration nears: time decay increases dramatically in the last 30 days as expiration approaches.
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Let's consider an example using Google (GOOG). If GOOG were trading at $500 when you bought a 490 strike call option for $25, then $10 of the option's value would be intrinsic value.
The other $15 would be time value. A 500 call purchased when GOOG is trading for 500 is at the money, but is all time value. It has no intrinsic value.
If the stock were at 500 when you bought a 510 call, the option is again all time value, since it has to rise $10 to be in the money.