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+374 Part Ill: Put Option Strategies 
+Second, the figures depict the change in rates or dividends as being instantaneous. 
+This is not completely realistic. If rates change, they will change by a little bit at a time, 
+usually¼% or½% at a time, perhaps as much as 1 %. If dividends are increased, that 
+increase may be instantaneous, but it will not likely occur immediately after the 
+LEAPS are purchased or sold. However, the point that these figures are meant to con­
+vey is that interest rates and dividends have a much greater effect on LEAPS than on 
+ordinary shorter-term equity options, and that is certainly a true statement. 
+COMPARING LEAPS AND SHORT-TERM OPTIONS 
+Table 25-1 will help to illustrate the problem in valuing LEAPS, either mentally or 
+with a model. All of the variables - stock price, volatility, interest rates, and dividends 
+- are given in increments and the comparison is shown between 3-month equity 
+options and 2-year LEAPS. There are three sets of comparisons: for options 20% out­
+of-the-money, options at-the-money, and options 20% in-the-money. 
+A few words are needed here to explain how volatility is shown in this table. 
+Volatility is normally expressed as a percent. The volatility of the stock market is 
+about 15%. The table shows what would happen if volatility changed by one per­
+centage point, to 16%, for example. Of course, the table also shows what would hap­
+pen if the other factors changed by a small amount. 
+Most of the discrepancies between the 3-month and the 2-year options are 
+large. For example, if volatility increases by one percentage point, the 3-month out­
+of-the-money call will increase in price by only 3 cents (0.03 in the left-hand column) 
+while the 2-year LEAPS call will increase by 43 cents. As another example, look at 
+the bottom right-hand pair of numbers, which show the effect of a dividend increase 
+on the options that are 20% in-the-money. The assumption is that the dividend will 
+increase 25 cents this quarter (and will be 25 cents higher every quarter thereafter). 
+This translates into a loss of 14 cents for the 3-month call, since there is only one ex­
+dividend period that affects this call; but it translates into a loss of 1 ½ for the 2-year 
+LEAPS, since the stock will go ex-dividend by an extra $2 over the life of that call. 
+TABLE 25-1. 
+Comparing LEAPS and Short-Term Calls. 
+Change in Price of the Options 
+20% out at 20% in 
+Variable Increment 3-mo. 2-yr. 3-mo. 2-yr. 3-mo. 2-yr . 
+Stock Pre. + 1 pt . 03 .41 .54 .70 .97 .89 
+Volatility + 1% .03 .43 .21 .48 .04 .33 
+Int. Rate + 1/2% .01 .27 .08 .55 .14 .72 
+Dividend + $.25/qtr 0 -.62 -.08 -1.18 -.14 -1.50