380 Part Ill: Put Option Strategies 
Using Margin. The same prospective initial purchaser of common stock might 
have been contemplating the purchase of the stock on margin. If he used the LEAPS 
instead, he could save the margin interest. Of course, he wouldn't have as much 
money to put in the bank, but he should also compare his costs against those of buy­
ing the LEAPS call instead. 
Example: As before, XYZ is selling at 50; there are 1-year LEAPS with a striking 
price of 40 that sell for $12; XYZ pays an annual dividend of $0.50; and short-term 
interest rates are 5%. Furthermore, assume the margin rate is 8% on borrowed debit 
balances. 
First, calculate the difference in prospective investments: 
Cost of buying the stock: 
$5,000 + $25 commission: 
Amount borrowed (50%) 
Equity required 
Cost of buying LEAPS: 
$1,200 + $15 commission: 
Difference (available to be placed in bank account) 
$5,025 
-2,512 
$2,513 
$1,215 
$1,298 
Now the costs and opportunities can be compared, if it is assumed that he buys 
the LEAPS: 
Costs: 
Time value premium 
Dividend loss 
Savings: 
Interest on $1,298 at 5% 
Margin interest on $2,512 debit balance at 8% for one year 
Net Savings: 
-$200 
- 50 
+$ 65 
+ 201 
+$ 16 
For the prospective margin buyer, there is a real savings in this example. The 
fact that he does not have to pay the margin interest on his debit balance makes the 
purchase of the LEAPS call a cost-saving alternative. Finally, it should be noted that 
current margin rules allow one to purchase a LEAPS option on margin. That can be 
accounted for in the above calculations as well; merely reduce the investment 
required and increase the margin charges on the debit balance.