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+386 Part Ill: Put Option Strategies 
+TABLE 25-3. 
+Factors necessary for January 2-year LEAPS to be = 14. 
+Stock price After l month 
+100 (unchanged) r = 3 .4% or 
+V + 5% 
+95 
+90 
+r = 6% or 
+V + 20% 
+r = 8.5% or 
+V + 45% 
+After 6 months 
+r = 6% or 
+V + 20% 
+r = 9.4% or 
+V + 45% 
+r = 12.6% or 
+V + 70% 
+to go in order to keep the value of the LEAPS call at 14 even after the indicated 
+amount of time had expired. 
+To demonstrate the use of this table, suppose the stock price were 100 
+(unchanged) after one month. If interest rates had 1isen to 3.4% from their original 
+level of 3% during that time, the call would still be worth 14 even though one month 
+had passed. Alternatively, if rates were the same, but volatility had increased by only 
+5% from its original level, then the call would also still be worth 14. Note that this 
+means that volatility would have to increase only slightly (by ½oth) from its original 
+level, not by 5 percentage points. 
+Even if the stock were to drop to 90 and six months had passed, the LEAPS call 
+holder would still be even if rates had iisen to 12.6% (highly unlikely) or volatility had 
+risen by 70%. It is often possible for volatilities to fluctuate to that extent in six 
+months, but not likely for interest rates. 
+In fact, as interest rates go, only the top line of the table probably represents 
+realistic interest rates; an increase of 0.4% in one month, or 3% in 6 months, is pos­
+sible. The other lines, where the stock drops in price, probably require too large a 
+jump in rates for rates alone to be able to salvage the call price. However, any 
+increase in rates will be helpful. Volatility is another matter. It is often feasible for 
+volatilities to change by as much as 50% from their previous level in a month, and 
+certainly in six months. Hence, as has been stated before, the volatility factor is the 
+more dominant one. 
+This table shows the effect of rising interest rates and volatilities on LEAPS 
+calls. It would be beneficial to the LEAPS call owner and, of course, detrimental to 
+the LEAPS call seller. This is clear evidence that one should be aware of the gener­
+al level of rates and volatility before using LEAPS options in a strategy.