Why I Buy Deep In The Money Call Options (Instead Of Buying Stock)

Okay, we all know that investing in the stock market is a great way to grow your portfolio over time. But in this video, I'm going to show you an alternative method to do exactly the same where it takes a lot less money upfront to versus purchasing shares of stock. It'll save you tons of money risk-wise and it'll also offer multiple return on investment, much better than shares of stock. So, what we're going to talk about today is one of my only and favorite option buying strategies, which is buying deep in the money call options. This strategy is so much better than just buying shares of stock. As I said, it'll cut down on your upfront capital. It's going to offer you a lot less risk, total risk on the downside, and it's going to increase your return on investment. All right, so we're going to run through an example and I'm going to show you why this is such a much better strategy than buying shares of stocks. So, let's just jump right in. All right, everyone. Leel here from smart optionseller.com. Now, for those of you that do watch my videos, you know that I talk mostly about option selling, specifically put option selling. But in this video, we're going to be talking right here buying deep in the money call options. This is the only option buying strategy that I really will put to use and to tell others to put to use. So, we're going to run through how it works, why it works. We're going to I'm going to show you an example, a real example of doing this with a real stock. I'm going to go through the numbers, show you how to find find these trades, and then I'm going to show you my spreadsheet and go through all the numbers so you can see for yourself why you're going to put up much less money. You're going to have a lot less downside risk and your returns are going to be so much better. So, if you were ever in the market to buy shares of stock, at least a 100 shares, okay? Then you should consider buying deep in the money call options instead of buying those 100 shares. Now, I must say this upfront. The strategy that we're looking at today, which is buying deep in the money call options, has to be compared to buying 100 shares of stock, okay? Because every single option contract contains 100 shares of stock. So, we have to play apples to apples here where we have to compare the strategy to buying 100 shares of stock. Now, if you don't have the money, if you have a smaller account and you don't have the money to even buy a 100 shares of stock or even to buy a deep in the money call option, then there's nothing wrong with that. You can still just go in and buy a couple shares or how much you can afford. But, as I'm saying in this video, we have to compare buying one call option to buying 100 shares of stock. All right, so let's run through the cheat sheet here. The cheat sheet here is buying deep in the money call option. And this is why I do it. I'll show you how I do it. and then you can decide for yourself if this is what you want to do. All right, so let's just talk about what it is. Now, when you buy call options, that is a bullish strategy. You are expecting the stock to go up in price. Buying call options, bullish. Okay, so here's some of the parameters. Follow my mouse here. When and if you were going to buy deep in the money call options, consider it the same as if you were about to buy shares of stock. You must be bullish on the stock. That is the most important thing. If you are not bullish on the stock, then don't buy shares and don't buy call options. Okay? So, you have to be bullish. Decide for yourself ahead of time what the stock is and that you are bullish on that stock. Now, call options or any option I should say has all different expiration dates. You can buy zero DTE expiration which the option expires on the same day. You can buy one day expiration, one month, six months. Most options can go out expirations to two two and a half years into the future. I'm going to show you the option chain and how that worked. Okay, before we go on with the rest of the presentation, I just want to tell you I use this strategy to piggyback off of Warren Buffett. I bought into his Berkshire Hathaway fund by using this strategy. So, if you want to see how I did it, how I used it, why I did it, and why piggybacking off of Warren Buffett is a great and easy thing because he's done all the research for me right there. I'm going to put a link down in the description below. It's all about the strategy and how I used it to basically ride the cold tales of Warren Buffet. So, if you're interested, take a look down in the description. I'll put it down there. Okay. So, whether follow my mouse here, whether you're looking at a short-term trade or a long long-term trade, number one, you have to be bullish on it. And you will pick the corresponding expiration date of that option that meets your parameters of how quickly you think the stock is going to go up. Now, for me personally, I take a longer term approach. I like to go pretty far out in time because when I invest in stocks, I'm investing for the long term. I want to hold on to these things for a long time. But that's just me. You can decide how long your horizon is. Okay? There's no right or wrong. Now, once we get into the option chain, the thing that makes what's called a deep in the money. Now, for those of you that aren't familiar with the terms, you have the stock price right here. And the option the option strike, which is where you would consider buying the shares of the stock, can either be what's called at the money, out of the money, or in the money. So, if the stock's at 100 and you buy an out- ofthe- money call option, that strike price is listed above the current stock price. That's called out of the money. If you buy an at the money call option, the strike price corresponds to where it closely meets meets the current price of stock. And an in the money call option has a strike price which is currently lower than the price of the stock. Now I know that most people are taught to buy when they buy call options or if they buy any option they're typically taught to buy maybe an at the money or an out ofthe money call option or put option because they are cheaper in dollar amounts. And I'm going to show you the option chain and how we figure that out. But in this case we're buying what's called deep in the money call options. These options have a lot of value already built into it and we're going to look at some math and I'm going to show you how that works. So once again, you're going to pick what's called a 90 delta strike within that expiration. What's a delta? Well, the delta tells you how much the option price moves in conjunction with how the stock moves. Deltas range from 0 to 100. And what we're going to do is we're going to pick that 90 delta, the 90 percentage delta. So 0 to 100 is the range for deltas. We're picking a 90. So the higher the delta, the more responsive the option price is to when the stock moves. So with a 90 delta option, that means the option price is going to fluctuate 90% of whatever the stock price flu fluctuates. If you choose a 10% delta, real low delta, that means the option price is only going to move about 10% of whatever the stock does. So think about this. When you buy an option, you want that option price to move in your favor. So eventually you can sell it for a profit. So if you pick a really high delta, that means the option price is going to move a lot when the stock does. That's what you want. Okay? A stock has a delta of 100. So whatever the stock does, that's what it does. the option moves accordingly to what the stock does based on its delta. So in this case, we're picking high delta, deep in the money. Only deep in the money options have high deltas. So we're choosing a very deep in the money call option with a 90 delta. So we're going to get a lot of movement out of the option price when the stock price moves. Okay? So that's the parameter right there. Now the other thing you always want to do is you want to calculate what your break even is on that option. When you buy the option, you have a break even price. Meaning, where does the stock need to move to in order for you just to break even on the option purchase? Okay? To calculate your break even, you're going to take the strike price and you're going to add the option cost to it. And I'll show you how what that is when we go through the example. Now, some considerations down here. I just want to make sure everyone understands this before we actually look at the option chain. Considerations. Whenever you buy or sell an option contract, you can close that position at any time you want. You don't have to wait for the expiration date. So right here, the trade can be closed at any time and that will produce a profit or loss at that time. So we're talking about buying call options here. You can buy it one day, sell it the next day, whatever you want. You you don't have to hold on to it until the expiration date. Now, also here, if the trade is in the money at expiration, there's three things that you can do once expiration date comes. You can either sell it, you can exercise it, or you can roll that option. Now, if the option is out of the money at expiration, there's nothing you need to do. The option will expire worthless, and you'll move on and the trade will just close out by itself. But we'll talk about that in a minute. Um, and if you do exercise the option, you're going to have to you're going to actually turn them into actual shares of stock, and you'll have to pay for the balance of those shares at that at that time. And I'll tell you what that means. And if you sell the position, you'll just collect whatever it's worth at that time for a profit or loss and and the trade will be done and and it'll and it'll be over. Now, let's just talk about risk management. Follow my mouse down here. People will always say, well, well, what do you do? Like, what if the position is underwater? What happens? How do you figure out when to get out of the trade? So, risk management is something that you do need to take into consideration whenever you're putting on any kind of position. Whether you're buying shares of stock, you should have a riskmanagement plan. If you buy shares of stock, when do you get out if the if the trade moves against you? That's a decision only you can make and that has to be made based on and know how the stock looks on the chart or if the option price moves a certain amount or if you lose a certain amount or if the stock price falls a certain percentage. Everyone's risk management or stop loss is different. You have to figure out what is right for you, you know, down here. Okay? Treat the position as you would if you own the stock. Have a stop loss. That's for you to figure out. Okay. So, now that we've kind of gone through the parameters here, let's jump into the option chain and figure out what we're going to do. But h and how to buy deep in the money call option, what's going to cost, what's the profit loss, and all that. So, before we do that, let's jump into the charts here, and I'm going to show you uh we're going to look at CocaCola, symbol KO. This is a chart of Coca-Cola up here. Uh two-year chart. Obviously, a great company, great dividend, long-term dividend paying company. Let's look at the monthly chart for Coca-Cola. And once again, as I say in every video, this is purely an example. This this is not a live recommendation. This is not telling you to buy deep in the money call options on Coca-Cola. I'm just showing you as an example. No rhyme or reason. Okay? So CocaCola long-term chart just going up up up over time. All-time highs just hit above $90 a share. So you know CocaCola is a great company. This is the daily chart right here. You are bullish on Coca-Cola. Well, let's assume you're bullish on Coca-Cola. You're not going to buy a 100 shares. You want to buy a deep in the money call option because Lel is telling you that it's going to cost you a lot less. you're going to have a lot less money at risk and your returns if the stock moves in your favor are going to be multiples of what you can get as if you bought the shares of stock. So, let's just assume Coca-Cola closed at $875 recently. It's in a nice uptrend. You want to get your hands on some some shares. So instead of buying a 100 shares and paying $8,700 for them, you want to find a deep in the money call option that will cost you a lot less. But we'll give you the same almost the same bang for your buck. We'll have a 90 delta option. And so what we're going to do now is we're going to go into the option chain and figure out which call option we will buy. So I have the call options pulled up here for CocaCola. Call options on the left hand side. Now, I do want to say when you pull up your option chain from your broker or wherever you find your option chain, there's a there's three columns that are the most important. The bid and ask columns that'll tell you exactly how much the option is worth at that time. And the delta column right here, you can see delta. You want to have the delta column in here. As I said, deltas range from 0 to 100. And we're going to pick a 90 delta option. And if Z and if option if deltas range from zero to 100, why am I choosing the 90? People always ask why why is it 90? Why isn't 85 or 80 or 99? For me personally, 90 the 90 delta is that sweet spot for getting you that 90% movement of what the stock does. Yet you don't there's there's the law of diminishing returns as you're getting up into these. You can see these deltas. There's a lot of $1, one delta 99 deltas. Okay, there's a point where you don't have to pay for these things because you're getting the same thing out of them. You're getting that 99 or 100 delta, but it's going to cost you a lot more. Moving down to the 90 delta is that sweet spot in in my opinion. Okay, so once you get to the option chain, you're going to be hit with all these expiration dates. Now, since I like to go out to the long term, I'm going to go out to the furthest expiration date, which is June 16th of 2028. So, a little less than two years from now. If my horizon is long-term for an option, I'm going to go out to the furthest expiration date. Now, what you want to do at that point is you're going to find the n the closest 90 delta option, see how much it costs, figure out your break even, and and and figure out how much the stock really has to travel in order for you just to break even. Okay, so we're in these June 2028 options. We're going to look for the 90 delta option, which the closest one here is this one, which corresponds to the 60 strike call option. And its current price is somewhere between 2835 bid, 29.95 offer. You have to multiply these numbers by 100 to get the actual dollar cost. Now, if Coca-Cola finished right around $87, um the and you can see 60 the 60 strike. Coca-Cola is here at 87. This 60 strike is $27 below the current price of Coca-Cola. That's what's called a very deep in the money option. Most people think, why would I want to buy a deep in the money option? Well, that's what I'm explaining to you now. If you were to exercise this $60 call today, that means you get to buy Coca-Cola for $60 a share and then you can immediately turn around and sell it for $87. That would lock in a $27 profit. That means that has value built in with it. But you're going to have to pay for that call option something more than $27. So if you exercise it and try to sell it for $87, you're going to lose on the trade because the option is going to cost you more than $27. So let's run through how that works. So we always want to try to do something in the middle between the bid and ask. So let's just assume we can buy this this uh call option contract for let's say $29.30 per contract. Okay, $29.30 somewhere in the middle here, a little bit more towards the ask. So that would cost us $2,930. Okay, I want to make sure everybody understands that if you pay $2930 for it, that's $2,930 that it'll cost you today to get your hands on the equivalent of a 100 shares of stock because every option contract contains a 100 shares of stock. So, for your investment of $2,930, now you hold 100 shares of stock uh as an option contract with a 90.3% delta. So, that means whatever Coca-Cola does movements up or down, this option price is going to move up or down around roughly 90% of whatever the stock price does. That's that. Now, we want to figure out what the break even price is. So, we know where Coca-Cola needs to go to at least to just break even on the trade. So, I'll break out the calculator here. Want to make sure I get the right numbers. So, in order to figure out your break even, you take the strike price 60 and you add whatever you paid for the call. So, that would be $29.3. That is $89.30. That is the break even. In order for you just to break even by buying this call option, all you need Coca-Cola stock to do is go up to $89.30 over the next $677 days. Let's go back to the chart here for a second. So, if Coca-Cola is at $87 now, and all you needed to do is go up a little over $2 in the next 30 in the next uh almost two years. Do you think that is feasible? And I think yes. Okay. If I need Coca-Cola just to go up to 8930, which is, you know, right around here or so, it's already done that. So, I'm giving myself almost two years of time for Coca-Cola just to go up $2 per share. I think that's a pretty good bet. So, for that bet, all I have to do is pay uh 20 $2,930. Okay. So, that's why I want to get into a long-term trade on Coca-Cola in my opinion and only pay $2,930 and my break even's only $2 a little over $2 from where Coca-Cola is now. I think that's a pretty good bet. So, the benefits, let's talk about the benefits now. paying $2,930 versus paying $8,700. You're getting thousands of dollars um off your upfront versus buying a 100 shares of stock, your total downside risk is slashed by thousands. So, if Coca-Cola goes to $0 per share, you're going to lose $8,700 if you had bought 100 shares, but the option loss will only be $2,930. you're going to lose a lot less money if Coca-Cola goes to zero. We know that's not going to happen, but the worst case scenario is you'll lose a lot less money and your upfront u capital outlay is thousands of dollars less as well. So, what I want to show you now is we're going to bring up my uh little spreadsheet here um that I created and we're going to talk about and I'm going to show you the numbers in this little little graph here. But I want to show you how this calculator works so everyone understands what we're looking at here. So, in the in the inputs here, we're going to put where the stock's current price is. We're going to put in the strike price. So, we're going to change this to uh $60 for the strike price. And we're going to put in the um 2930 for the option premium that we paid. And the expiration date is, let's go back. What's the expiration date? June 16th of 28. So, we'll put that in here. And just give me a second while it changes. June 28. June, I'm sorry, 16, 2028. And now it'll show us the here's some of the numbers. The cost of buying 100 shares versus the cost of buying one one option contract. And the break even of the stock obviously is whatever you pay for it. And the break even on the option is 8930. And here's what your max loss could be as I just told you 6677 days until expiration. Now what I want to show you here is the little comparison here. What what this is showing you is where your dollar um gain will be and your percentage gain or loss will be based on different prices of the stock. Okay. So, right here in the middle is the break even for the stock and the break even for the option. So, here's stock price 8705. Here's how much you'd make or lose on the stock. And8930 is your your break even for the option. Now, I want to show you the downside and the upside as well. on the downside. Obviously, if if um Coca-Cola goes down, you're going to lose money on both the stock and the option. But worst case scenario, you can the max loss is $2,930 on the option, and your max loss is $8705 on the stock. So various numbers on the downside, it's always you're always going to lose a little you'll lose a little bit um you'll lose less on the major downside moves and you'll lose a and lose a little bit more if the stock only moves down a little bit. So if the stock never moves at all, if Coca-Cola stays at $87 through the whole trade whatsoever and stays at 8705 through the whole trade, your maximum loss on the option is only $225. So you have to understand that that's what's called the time decay. The when you buy deep in the money options, the time decay is very little. People always ask me, well, what about time decay? If I'm buying options, I'm going to lose to time decay. Yes, there's always going to be time decay, but deep in the money options have very small time decay or theta compared to the other strikes. So Coca-Cola goes nowhere. Your maximum loss in the option was only $225. And then as the stock falls lower and lower, you can see the various amounts of money you can lose. Obviously, it'll be a 100% of the option premium, but the dollar amounts will still be smaller than what the stock will lose from a certain point. Okay? Now, what I want to show you on the upside is the returns you can get percentage- wise. If you if let's just say Coca-Cola go Coca-Cola goes all the way up to $175 in that next two years, it's feasible. The the the stock will make $87.95, $8,795 and it'll be a little over 100% return on investment. The option will make $8,570. So, it's almost the same dollar amount. But here's the kicker. your return 292% versus 101% for the stock. So the option as long as it goes in your favor, your returns are going to be almost triple than what you would get as if you had if you had bought the shares instead. Okay. Now just always remember the benefits of buying the deep in the money call option is the reduced risk, the reduced cost, okay, and your better returns on the upside. Now, on the downside, yes, you can lose 100% of the option cost, but the dollar amount will always be less. On the upside, that dollar amount is still less, but you're still getting almost the same amount of dollar gain, but the kicker is the return on uh your money because you're putting up a lot less money up front. Okay? That's why the returns are so much better. So, for me, the little bit of money I could lose if the stock goes nowhere is still worth it to buy a deep in the money call option versus stock. Now, let's go back to the option chain here for a second and let's look at a shorter term trade. Let's just say you're looking at October. Let's just say your your your time frame is very short, 68 days. You do the same thing. You look for the 90 delta option, the closest 90 delta option, which would be this 77 12 call right here. will cost you, let's say, $10.15 per contract. That's $1,000. That's $1,15. And that's, you know, over $7,000 less it'll cost you versus buying a 100 shares. Now, we can put that back in the calculator. So, let's look at uh the strike is 77.50 50 and the premium is uh $10.15 and the expiration is uh October I think it was October, right? October 16th. Yep. 2026. And so here's the numbers again. A lot less downside risk. And here's your break evens, all of that. So, let's just assume on the upside, let's just just say Coca-Cola goes to $100 a share in the next 60s something days. Here's your dollar gain. Your dollar gain. Dollar gains are almost the same, but your returns are multiple multiple 121% versus a almost 15% for the stock. So, once again, whether you choose short-term or long-term, that's up to you. But again, the numbers are are work great on the upside if it's on the upside. Now, on the downside, there's nothing you can do about it. If the stock starts to go down, you're going to lose money on the option. You'll lose money on the stock. Nothing you can do about that. That's where your riskmanagement plan comes into place. If the stock starts to move against you and starts going down, what do you do? That's a plan that you have to have ahead of time. I can't tell you what to do for that. Okay, let's go back to the to the uh cheat sheet here for a second. And um that's it. Um, so let's talk about at the end here. So if the option is still in the money at expiration, let's say, um, let's say Coca-Cola is at $100 at expiration and and we had bought that 60 strike call option two years out. Well, that's $40. That's $40 in the money. Okay, here we'll we'll go back and we'll look at the option chain and I'm going to show you how that works. Let's go back out here. So, let's just assume uh Coca-Cola finishes at $100 at expiration and we bought this 60 strike. That means if you exercise your calls, okay, and you turn them into shares of stock, what you'll have to do at that time is you're going to have to pay $6,000. Okay? Yes, you you paid the 2930 upfront, but in order to now take control of the shares, you have to pay for the balance, which is another $6,000. So $6,000 plus $2,930 is $89 $8,930. That's your total outlay. And if if you paid $8,ou if you if your break even is $8930, $89.30 and now Coca-Cola is at 100. Now you have that there's your your profit right there. And you can just go to the uh go to the spreadsheet and and see what happens when when Coca-Cola's at 100. Now, this is for that that 77 strike, but we can put in the 60 strike here. And we paid 2930 for it. And if Coca-Cola is at 100, you're going to make uh $1,70 and your return will be 36.5%. That's how it works. Okay? So, excuse me. That's why I like to buy deep in the money call options versus buying a 100 shares of stock. I'm in for the long haul. You can decide what you want to do, but I wanted to show you why I love the strategy so much. All right, that's it. That's all about buying deep in the money call options. If you found value in this video, down in the description, you can read down below. I'll put some links for things um that you could take a look at. But please give me a thumbs up, give me a like, leave me a comment, tell me your thoughts today. Hope this has been helpful. This is Leel. I'll see you in the next one.