Transcription
All right, traders. In this video, we're going to be going over one of our most popular topics in options trading. Buying deep in the money call options versus buying shares of stock. I've made many videos on this subject before. For whatever reason, these videos get more views than any other videos that I make. So, once again, we're going back to that topic.
Buying deep in the money calls versus buying stocks will save you thousands of dollars, will slash your risk by thousands of dollars and by lots and lots of percent, and it can offer you return on investments of at least triple versus buying shares of stock. So I always tell my students if they're looking to buy at least 100 shares of any stock, they should consider buying deep in the money call options instead.
So in this video, I will go over an example with you. I will show you real numbers, how much money you can save, how much your potential return on investment can be. It is so much better than buying shares of stock. Now, of course, every option contract consists of 100 shares of stock. So to compare apples to apples, we will compare it to versus buying 100 shares of stock. I'm going to pick a stock here that's relatively modest in price so you can really see the difference. So buying deep in the money calls will save you lots of money versus buying shares of stock. And the way that we structure the trade is you're going to get almost the same exact movement as if you would have if you had bought the shares instead.
All right, so let's just jump right in and talk about what buying deep in the money calls are. Why do we like to do it? And I will show you the results with real numbers. Okay, let's go.
All right, everyone. Lee Lo here from smartoptions.com. Before we get to that page, let me bring up my cheat sheet. Everyone seems to like the cheat sheets. They say, "Lee, please bring back the cheat sheets." So, in the video, I'll give you a little synopsis here. Buying deep in the money calls versus buying shares of stock. You can save thousands of dollars by buying the calls versus the stock, slash your risk, and produce triple returns. And in this video, it's almost quadruple returns. And you're going to love what I'm going to show you here.
So let's just talk about what buying deep in the money calls are, the criteria, and then we'll look in a re- we'll look at a real example. Now, when you buy calls, it is a bullish strategy. You are expecting the stock to go up. So don't use it for any other outlook you have for the stock. You must be bullish on the stock. Buying buying calls in general is a bullish strategy. But in this case, we're buying what's called deep in the money call options. And that's just a term that describes where the strike price lies in comp compared to where the current stock price is. There's three types of strike prices, and there's three ways to describe them: out of the money, at the money, and in the money.
If the stock's at 100, an at the money strike price is like the 100 strike price. It's the closest strike to the current price of the stock. If you buy out of the money call options, the strike price is listed above the current stock price. So if the stock's at 100, the 110 calls, the 120 calls, 130 calls, those are what's considered out of the money. Now, in the money calls, which a lot of people never really think about using, have their strike prices listed below the current price of the stock. So the stock's at 100, we're looking at the 90 calls, 80 calls, 70 calls. Those those strikes are in the money. They're below the current price of the stock. And what we're doing is we're talking about buying deep in the money calls that have a specific delta.
So let's just kind of go through the criteria here and then we'll go through the example. Number one criteria, you have to be bullish, or at least you're bullish for some time in the future. Okay, the the way that we're going to look at it today, we're going to use an almost one year out in time expiration because if you buy a stock, sometimes you need to give that stock some time to move. Same thing with the options. You got to give the option some time to move. So, we're going to go a little bit further out in time. And in that option with the deep in the money call, you want to use a delta that has at least 90%. Deltas range from zero to 100. The higher the delta, the more responsive the option price will be to movements in the stock price.
Everyone knows that every option contract has its own price. It's called the premium. And that option price fluctuates according to how the stock moves as well, along with today's expiration volatility. But the biggest driver of how options move is where the stock goes. And when you buy an option, you want bang for your buck. Meaning, you want that option price to move when the stock does. So when you buy a very high delta, that's deep in the money. Only deep in the money options have a very high delta. So the 90 delta is going to track that the option price is going to track the stock price movements by 90%. So if the stock moves a dollar, your option price is going to move move about 90 cents per contract or $90. That's 90% of the movement. Okay? So we want to pick options that have a high delta that are going to move when the stock does. And you pick your expiration date. If you want to give yourself a lot of time for the trade to play out, use a longer-term expiration. Sure, you can use these on one-day expirations, one-week expirations, one-month expirations, but markets and stocks are so erratic in that short of a time frame. You got to give yourself time to let the trade develop. All right? And you always want to calculate what your break-even is. When you purchase an option contract, you take the strike price, you add the option price to it, and that gives you your break-even price on where the stock needs to move to. Okay, those are the criteria. Those are the, you know, the basic facts of how you pick a deep in the money option, call option.
So, we're going to look at an example with Cisco. And in this particular case, in this example, I'm going to show you how you can save $5,000 by buying the calls versus buying the stock. And you can make uh that'll save you 73%, 73% less money that you have on the line. That's pretty impressive. And the returns are going to be more than triple, almost quadruple in this case. I won't say quadruple, it's like 3.75 um times what you can get versus buying shares of the stock. Okay. Now, I'm going to show you the numbers and when we come back here, we're going to look at the what you can do at expiration and your risk management. All right.
So, let's just jump right in. Let's go to the first, we're going to look at the stock charts. Okay, so we're assuming that you're bullish on Cisco. You want to get long Cisco and you're thinking about, should I buy a 100 shares of Cisco or should I buy some call options? Now, you know, let's look back at a monthly chart of Cisco. Now, Cisco topped out in in the 2000. The dot meltdown has not gotten back up to those all-time highs that it made back in 2000. Cisco right now is very close to $68 a share, trying to get to that $82, $83 level that it hit back in 2000. So you're thinking, I, it's only a matter of time. I know Cisco is going to break all-time highs. Look at it in just the last month or so, it's gone up really well. I know it's going to do it. So I want to get long on Cisco. So we're using Cisco as our as our example here. Okay.
And we're going to go into the option chain. We're going to look at some options on Cisco. And I'm going to show you the I'm going to show you uh an option calculator as well. Show you how the numbers work. And we're going to break it all down. I have a little uh Excel spreadsheet as well. You're going to see how all the numbers work. So, we're looking at Cisco. Here's the option chain. Here's Cisco tab up here. Call options on uh the left here, put options on the right if you're if you're not familiar with an option chain is. And the last price of Cisco in the aftermarket 6837, but we're going to round down to $68 a share. At the 4:00 p.m. Eastern close, it closed just under $68. So, we're going to use $68 as our base. And in the expiration here, we're going out to the June 2026 expiration, 250 days from now. So, we're definitely giving this trade some time to develop. You know, we got the back and forth, but over time, we're hoping or thinking Cisco is going to make a move up and break those all-time highs.
Now, when you get into your option chain, you want to make sure that you have the delta column right here. Okay? You have your bid-ask column, which is really the only pricing column that you need. The bid-ask price tells you exactly what the current value of that option is. You don't really need to look at the last column because sometimes those last prices traded, you know, a day ago or a week ago depending on how uh popular that strike is. So, always look at the bid column, gives you the the up-to-date information and have your delta. So, all you have to do is you pick your expiration and then you scan over to the delta column and you find the closest to 90 delta. And in this case, we're going to use the 52 and a half strike calls. It has an 88.8% delta. We could have used the 50s, but we're going to go with these 52 and a halfs. And you scan over to the bid-ask column. Somewhere in the middle is what's called fair value of the bid-ask spread. So we're looking at roughly $18 and we're going to use $18.30 per contract as our midpoint. $18.30 per contract. Since every option contract has a 100 shares of stock, you have to multiply these numbers by 100 to get your actual cost outlay. So that would be $1,830 in order to buy one of these contracts.
Now compare that to a 100 shares of Cisco at 60 uh what do we say? We're going to use 68 or 6830. I have to go back and look at the numbers once we get to the spreadsheet, but whatever it's over $6,800 or at least $6,800 to buy 100 shares of Cisco. One contract of these is going to cost you $1,830. So right there, you're saving five at least $5,000 versus buying a hundred shares of stock and you have very close to a 90 delta, which means whichever way Cisco stock moves, this option price is going to move at least very close to 90% of it. That's why we want to get the 90 delta. And you can see the 52 and a half strike is listed or h is well below the current price of the stock. Okay.
So, what do we want to do next? We want to compare at various levels of the stock price how much the call option can make versus how much the stock can make. Also, how much you can lose versus how much the stock can lose. And I drew up this handy. Let me get rid of some of these numbers here because they don't matter in this case. Now, what we're doing in this situation is we're comparing buying a 100 shares of Cisco at what was okay. So $6.30, that's the that's the price we used in this calculation. So, we're comparing various stock prices here from zero to $140 a share. And we're looking at the actual dollar returns and the and the percentage returns of the stock versus the call option.
So, let's look at the downside first at the risk. Now, whenever you purchase an option contract, the most you can ever lose is what you paid for that option contract. So, if Cisco goes from its current price of $68.30 down to zero, the most you can lose with the call option is the investment of $1,830. And that is a 100% loss of your investment. Conversely, with the stock, if you bought a 100 shares at $68.30, your maximum loss is $6,830. 100% loss. In this case, the option is going to lose $5,000 less. Okay? So, you have $5,000 less dollars at risk. And although both are a 100% loss, you lost $5,000 less than all the shareholders.
Now, as you move up in the stock price, you can see the uh break-even for the stock price is $68.30. You can see here zero gain, zero percentage gain. And although at from the strike price and below, you can lose 100% of your money, the the dollar amount is almost the same as what you will lose um from the stock or I should say versus the stock up to a certain point. Okay. At break-even, the the option price will break-even. The option trade will break-even at $70.80 per contract. Now, I want to show you how you figure out what your cost basis is. You always take the strike price and add the option cost to it. So, in this case, it is the uh strike price is 5250. You know, 52.5 plus 18.3 is $70.80. Okay? Okay, want to make sure everyone understands that. We can go back to the option chain real quick. So, here it is. 52.5, you add 18.3 to it is 70.8. Okay. So, if you bought the call options, all you would need is for Cisco to get up to $70.80 per share in the next 250 days. We go back to the chart. So, what we're seeing here is let's go to the daily chart here. $70.80 is roughly the high of the the day here. Let's see what the high was. Um, the high. So $70.80 is right here, right where my mouse is. So if you buy this call option, Cisco has to move right back to here to break-even. Anything above that, if Cisco starts going all the way up above $70.80, you're making money. Now, if you bought the stock, your break-even obviously is whatever you paid for the stock, which is $68.30 in this case. So, the call option needs Cisco to move up a little bit further than the stock's break-even. But once it gets above $70.80, you're golden. You're making just as much money as you would with the stock. Okay? So, I want to make sure everyone understands the break-even.
So, let's go back to the the spreadsheet here. Once we get above break-even for both of these, 6830 and 7080, here's how it works. The options dollar value profits will always lag by about $250. That's the difference. Okay, $250. If we get all the way up to $140 in Cisco, the call option will make $6,920. The stock will make $7,170. That's a two only a $250 difference. The real kicker here is the percentage returns on the call option. At $140, you're making 378% return versus 105% return for the stock. That is almost four times, almost quadruple. I'll say 3, you know, 3.7 times better roughly by buying the call options. And if we get up, let's say we just get up to $80 a share. Cisco's currently at 6830. If it gets up to 80, the call option will make $920. The stock will make $1170. 17% return for the stock. 50% return for the call options. More than three times better. So you have to understand the value of buying the deep in the money call. And these are all the numbers at expiration. You know, during the trade, the numbers can be different. I'm talking about the numbers if you're going to hold this thing all the way to expiration. Okay? You have to see the value. Even on the downside, if the stock craps out to zero, you're going to lose $5,000 less. On the upside, you're going to be making just $250 less, but the percentage returns are over three times better. Can you see the value of that by buying a deep in the money call versus buying shares of stock?
The only difference that I can think of besides the small difference in the dollar and the small difference in the actual break-even, if you wanted to get dividends on the stock. You don't get dividends as a call option buyer. Nor do you get uh um the opportunity to go to the annual shareholders meeting. A lot of stocks don't even pay dividends. In my opinion, it's so much more worth buying the calls versus, you know, having to give up a dividend. You save so much more money. Okay? Your percentage returns are so much better on the upside. To me, I don't care about the dividends and going to the, you know, the the shareholders meeting. If you want to go to the shareholders meeting, then just buy yourself one single share of stock and then you can go to the shareholders meeting. All right.
So, let's go to the option calculator here. I want to show you how the numbers work and so you so you understand that can the do these numbers really work. Okay. Now you can go to barchart.com right here, barchart.com. They have their free options calculator. You type in the symbol. I typed in Cisco and it's going to default. They're going to put the numbers in for you. Here's the inputs on the left. The outputs over here. What you really care about is the theoretical value and the delta. Now, we're looking at we're going to put this as 6830. Okay, we're going to play with the same numbers here and we're looking at the 5250 strike and we're going out to um let's use the it was the June 18th, 2026. So, we got the 250 days expiration. They bar chart will put in the the risk-free interest rate, the volatility rate, and the dividend yield. These the interest rate and dividend yield we don't really need to worry about. Okay.
So, we're looking at 6830, we're looking at the 5250, and we're 250 days in the future. Now, all we have to do is at this point, the option is worth about seven. They valued at $17.15 with the stock price at 6830. We're paying $18.30. So we're actually we're actually costing we're saying it costs more than what bar chart is coming up with. If we go back to the option chain here, the 5250s went out at 1710 at 1945. So it's somewhere in the middle. Bar chart is I in this case underestimating the value of the call option. The delta is roughly very close to what we're looking at, which is 88%.
Now, we're going to go out to expiration date. We're going to assume that um Cisco moves up to the $140 strike price with zero days left. So, at expiration, the option contract will be worth $87.50 per contract. Okay? How do they get that number? You take 5250, which is the strike price, and you subtract it from the stock price. Okay, this is pure profit right here. Okay, let me pull up my calculator here. So, make I want to double check these numbers. So at $140 minus the strike price at 5250, the option contract, the call option contract is worth 87.50, but you have to subtract out the $18.30 that you paid for it to begin with. And your net profit is $6,920. Let's make sure that I came up with that number right there. $6,920 is the net profit on the call option. Once again, to find out the final value of the call option strike price, I'm sorry, the dollar value, subtract out the strike price of 5250. That gives your intrinsic value. Then you minus out what the option cost, $18.30 per contract. And there you got your $6,920. That's how you figure out what your net profit is on the call option. So that's how it works. The the calculator backs it up. On expiration day at $140, this strike price call option will be worth $87.50. Subtract out the $18.30 from that and that gives you your final net dollar amount. Okay? Then as you want to figure out the percentage, just so you're knowing how the numbers work, the um $6,000 you divide $6,920 profit divided by your investment which was $1830 and that's how you get the $378% return. It's amazing. It truly is amazing.
You buy the deep in the money call with the 90 delta. It's going to track it's going to track the stock. You know, once it starts getting above the break-even, that delta is going to keep getting higher, too. So, it starts out in 88 delta. Eventually, it's going to move up to an almost 100% delta, which means it's moving point for point with the stock. You're saving thousands of dollars. You're cutting your risk. Okay? Look at it this way. $5,000 that you're saving versus uh 6830 6,830 if you bought the stock, you're saving 73%. That $5,000 savings is actually a 73% savings on your out um your upfront debit by buying the calls instead of the stock. I don't see any other reason why you should be buying if if you can afford to buy a hundred shares of stock. Now, if you only have like a couple hundred, this won't work for you, okay? Then you just buy yourself a couple shares of stock to how much money that you have to to play with. But if you have enough money, at least $1,830 in this case, save yourself $5,000 by spending the $1,830 by buying the deep in the money call option. Okay, there's there's no other reason to do it.
Once again, here's the spreadsheet. We can go back to the cheat sheet. Okay, I want to see what else we have here. All right, so I want to go over these last couple items here. So if you get to expiration and and the stock has definitely moved in your favor, but of course all options have an expiration date. So you have to do something at expiration with that call option. So you have three choices. Number one, you can exercise the call options into actual shares of stock. Now, if you do that, you're going to have to come up with a balance of the money to pay for the rest of the stock. The initial options price that you paid is like a down payment. When you get to expiration, you're going to have to pay the balance $5,250 um out of that. You're gonna have to pay the balance of that out of the 1,830 that you've already paid for. So, if you don't have money to come up with the balance, then you don't want to exercise the shares.
Now, if you think Cisco's topped out, all you have to do is sell the call option, you know, a couple minutes before expiration on that day. Sell the call options and you take your profit and run and the trade is close out. If you want to stay in the trade, if you think Cisco's got more room to run, then you what you can do is roll. Okay, so here's your thing. Three things. You can sell the option, take your money and go. You can roll, which means you're going to sell your current Cisco deep in the money call. And now you're going to take those proceeds and buy yourself a new deep in the money call for another nine months, 10 months, whatever out in the future if you're still bullish. Now, obviously, if the stock drops, you may have a loss. So, it's not always there's nothing there's no guarantees, okay? Any investment could lose money, but you know, in this case, if the stock really takes a dive, you're going to lose less than all the shareholders. So if you do sell the contract at some point it may be a loss, but if it's higher you can sell it for a profit, roll it, or take exercise and take ownership of the shares.
Now, last thing, risk management, always important whenever you're playing with any position, have a stop-loss or risk management plan. What is your stop-loss plan? Stop-loss can be based on if the stock falls a certain amount, you get out. If the stock falls a certain percentage amount, you get out. If you lose a certain dollar amount, get out. If the stock, if you're watching the stock charts and the stock breaches a certain support level that you that you don't want to hold anymore, get out. Otherwise, or you do nothing and you just hope and wait and pray and see what happens. Buy and hold. It's up to you. But don't get upset if the stock goes down and you lose money because all investments can lose money. By invoking the deep in the money call trade, at least you're saving yourself thousands of potential dollars, which is up to 73% less in this case, and your returns on investment on the upside is more than triple in this case. Okay, so there it is. For me, it is a a much better way to put your money on the line by buying deep in the money calls versus buying stock.
Now, I want to quickly go to our website. Um, where are we? Smartoptions.com. Here's our website, smartoptionseller.com. I wrote an ebook using this strategy on Warren Buffett. Meaning, if you don't know what stocks to pick, if you're like, I I want to do this strategy, but I don't know what stocks to pick, all you have to do is piggyback the master, ride the coattails of Warren Buffett, and invoke the deep in the money call strategy. I wrote this ebook. I updated it for 2025, showed in great detail how to use this strategy by pigging back by piggybacking off the greatest investor of all time, Warren Buffett. All right. So, go to our website, click on the Warren Buffett ebook, take a look at this thing, and uh, you know, see what you want to do with it.
That's it. I hope this video has been helpful. I hope you understand how amazing buying deep in the money calls are versus buying shares of stock. If you found value in this video, please give me a thumbs up, give me a like, tell your friends about it, help me reach my goal of 50,000 YouTube subscribers here. Down in the description, I'll also put the link for this Warren Buffett book on the screen. I'll also put another video I made about buying deep in the money calls. So, you can keep watching. Leave me a comment. Send me an email. I make these free videos for all of us. Help everybody out. That's what I do. All right, everyone. This is Lee Lo. I'll see you in the next one.