Chapter 25: LEAPS 
FIGURE 25-3. 
LEAPS call pricing curve as dividends increase. 
30 
25 
(I) 
.g 20 
0.. 
C: 
:g_ 15 
0 
10 
5 
0 
70 80 90 100 
Stock Price 
With 
Current 
Dividend 
110 
373 
Dividend 
)> Increases 
$1 
T Increases 
$2 
120 
The actual amount that the LEAPS calls lose in price increases slightly as the 
call is more in-the-money. That is, the curves are closer together on the left-hand 
(out-of-the-money) side than they are on the right-hand (in-the-money) side. For the 
in-the-money call, a $1 increase in dividends over two years can cause the LEAPS to 
be worth about 1 ½ points less in value. 
Figure 25-3 is to the same scale as Figure 25-2, so they can be compared direct­
ly in terms of magnitude. Notice that the effect of a $1 increase in dividends on the 
LEAPS call prices is much smaller than that of an increase in interest rates by 3%. 
Graphically speaking, one can observe this by noting that the spaces between the 
three curves in the previous figure are much wider than the spaces between the three 
curves in this figure. 
Finally, note that dividend increases have the opposite effect on puts. That is, 
an increase in the dividend payout of the underlying common will cause a put to 
increase in price. If the put is a long-term LEAPS put, then the effect of the increase 
will be even larger. 
Lest one think that LEAPS are too difficult to price objectively, note the follow­
ing. The prior figures of interest rate and dividend effects tend to magnify the effects 
on LEAPS prices for two reasons. First, they depict the effects on 2-year LEAPS. That 
is a large amount of life for LEAPS. Many LEAPS have less life remaining, so the 
effects would be diminished somewhat for LEAPS with 10 to 23 months of life left.