Chapter 25: LEAPS 381 
In summary, a prospective purchaser of common stock may often find that if 
there is an in-the-money option available, the purchase of that option is more attrac­
tive than buying the common stock itself. If he were planning to buy on margin, it is 
even more likely that the LEAPS purchase will be attractive. The main drawback is 
that he will not participate if cash dividends are increased or a special dividend is 
declared. Read on, however, because the next strategy may be better than the one 
above. 
PROTECTING EXISTING STOCK HOLDINGS WITH LEAPS PUTS 
What was accomplished in the substitution strategy previously discussed? The stock 
owner paid some cost ($102 in the actual example) in order to limit the risk of his 
stock ownership to a price of 39½. What if he had bought a LEAPS put instead? 
Forgetting the price of the put for a moment, concentrate on what the strategy would 
accomplish. He would be protected from a large loss on the downside since he owns 
the put, and he could participate in upside appreciation since he still owns the stock. 
Isn't this what the substitution strategy was trying to accomplish? Yes, it is. In this 
strategy, only one commission is paid- that being on a fairly cheap out-of-the-money 
LEAPS put - and there is no risk of losing out on dividend increases or special divi­
dends. 
The comparison between substituting a call or buying a put is a relatively sim­
ple one. First, do the calculations as they were performed in the initial example 
above. That example showed that the stockholder's cost would be $102 to substitute 
the LEAPS call for the stock, and such a substitution would protect him at a price of 
39½. In effect, he is paying $152 for a LEAPS put with a strike of 40- the $102 cost 
plus the difference between 40 and the 39½ protection price. Now, if an XYZ 1-year 
LEAPS put with strike 40 were available at 1 ½, he could accomplish everything he 
had initially wanted merely by buying the put. 
Moreover, he would save commissions and still be in a position to participate 
in increased cash dividends. These additional benefits should make the put worth 
even more to the stockholder, so that he might pay even slightly more than 1 ½ for 
the put. If the LEAPS put were available at this price, it would clearly be the bet­
ter choice and should be bought instead of substituting the LEAPS call for the com­
mon stock. 
Thus, any stockholder who is thinking of protecting his position can do it in one 
of two ways: Sell the stock and substitute a call, or continue to hold his stock and buy 
a put to protect it. LEAPS calls and puts are amenable to this strategy. Because of 
the LEAPS' long-term nature, one does not have to keep reestablishing his position 
and pay numerous commissions, as he would with short-term options. The stock­
holder should perform the simple calculations as shown above in order to decide