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+Chapter 25: LEAPS 393 
+The larger premium of the LEAPS call that was written produces this dramatically 
+lower break-even price for the LEAPS covered write. 
+Similar comparisons could be made for a covered write on margin if the investor 
+is using a margin account. The steps above are the mechanical ones that a covered 
+writer should go through in order to see how the short-term write compares to the 
+longer-term LEAPS write. Analyzing them is often a less routine matter. It would 
+seem that the short-term write is better if one uses the annualized rate of return. 
+However, the annualized return is a somewhat subjective number that depends on 
+several assumptions. 
+The first assumption is that one will be able to generate an equivalent return six 
+months from now when the July 50 call expires worthless or the stock is called away. 
+If the stock were relatively unchanged, the covered writer would have to sell a 6-
+month call for 4 points again six months from now. Or, if the stock were called away, 
+he would have to invest in an equivalent situation elsewhere. Moreover, in order to 
+reach the 2-year horizon offered by the LEAPS write, the 6-month return would 
+have to be regenerated three more times (six months from now, one year from now, 
+and a year and a half from now). The covered writer cannot assume that such returns 
+can be repeated with any certainty every six months. 
+The second assumption that was made when the annualized returns were cal­
+culated was that one-half the return if exercised on the LEAPS call would be made 
+when one year had passed. But, as has been demonstrated repeatedly in this chapter, 
+the time decay of an option is not linear. Therefore, one year from now, if XYZ were 
+still at 50, the January 50 LEAPS call would not be selling for half its current price 
+(½ x 8½ = 4¼). It would be selling for something more like 5.00, if all other factors 
+remained unchanged. However, given the variability of LEAPS call premiums when 
+interest rates, volatility, or dividend payouts change, it is extremely difficult to esti­
+mate the call price one year from now. Consequently, to say that the 21.5% 2-year 
+return if exercised would be 10.8% after one year may well be a false statement. 
+Thus, the covered writer must make his decision based on what he knows. He 
+knows that with the short-term July 50 write, if the stock is called away in six months, 
+he will make 6.9%, period. If he opts for the longer term, he will make 21.5% if he 
+is called away in two years. Which is better? The question can only be answered by 
+each covered writer individually. One's attitude toward long-term investing will be a 
+major factor in making the decision. If he thinks XYZ has good prospects for the long 
+term, and he feels conservative returns will be below 10% for the next couple of 
+years, then he would probably choose the LEAPS write. However, if he feels that 
+there is a temporary expansion of option premium in the short-term XYZ calls that 
+should be exploited, and he would not really want to be a long-term holder of the 
+stock, then he would choose the short-term covered write.