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+370 Part Ill: Put Option Strategies 
+1. underlying stock price, 
+2. striking price, 
+3. time remaining, 
+4. volatility, 
+5. risk-free interest rate, and 
+6. dividend rate. 
+The relative influence of these factors may be a little more pronounced for 
+LEAPS than it is for shorter-term equity options. Consequently, the trader may think 
+that a LEAPS is overly expensive or cheap by inspection, when in reality it is not. One 
+should be careful in his evaluation of LEAPS until he has acquired experience in 
+observing how their prices relate to the shorter-tenn equity options with which he is 
+experienced. 
+It might prove useful to reexamine the option pricing curve with some LEAPS 
+included. Please refer to Figure 25-1 for the pricing curves of several options. As 
+always, the solid intrinsic value line is the bottom line; it is the same for any call 
+option. The curves are all drawn with the same values for the pertinent variables: 
+stock price, striking price, volatility, short-term interest rate, and dividends. Thus, 
+they can be compared directly. 
+The most obvious thing to notice about the curves in Figure 25-1 is that the 
+curve depicting the 2-year LEAPS is quite flat. It has the general shape of the 
+shorter-term curves, but there is so much time value at stock prices even 25% in­
+or out-of-the-money, that the 2-year curve is much flatter than the others. 
+Other observations can be made as well. Notice the at-the-money options: The 
+2-year LEAPS sells for a little more than four times the 3-month option. As we shall 
+see, this can change with the effects of interest rates and dividends, but it confirms 
+something that was demonstrated earlier: Time decay is not linear. Thus, the 2-year 
+LEAPS, which has eight times the amount of time remaining as compared to the 3-
+month call, only sells for about four times as much. This LEAPS might appear cheap 
+to the casual observer, but remember that these graphs depict the fair values for this 
+set of input parameters. Do not be deluded into thinking that a LEAPS looks cheap 
+merely by comparing its price to a nearer-term option; use a model to evaluate it, or 
+at least use the output of someone else's model. 
+The curves in Figure 25-1 depict the relationships between stock price, striking 
+price, and time remaining. The most important remaining determinant of an option's 
+price is the volatility of the underlying stock. Changes in volatility can greatly change 
+the price of any option. This is especially true for LEAPS, since a long-term option's 
+price will fluctuate greatly when volatility changes only a little. Some observations on 
+the differing effects that volatility changes have on short- and long-term options are 
+presented later.