386 Part Ill: Put Option Strategies 
TABLE 25-3. 
Factors necessary for January 2-year LEAPS to be = 14. 
Stock price After l month 
100 (unchanged) r = 3 .4% or 
V + 5% 
95 
90 
r = 6% or 
V + 20% 
r = 8.5% or 
V + 45% 
After 6 months 
r = 6% or 
V + 20% 
r = 9.4% or 
V + 45% 
r = 12.6% or 
V + 70% 
to go in order to keep the value of the LEAPS call at 14 even after the indicated 
amount of time had expired. 
To demonstrate the use of this table, suppose the stock price were 100 
(unchanged) after one month. If interest rates had 1isen to 3.4% from their original 
level of 3% during that time, the call would still be worth 14 even though one month 
had passed. Alternatively, if rates were the same, but volatility had increased by only 
5% from its original level, then the call would also still be worth 14. Note that this 
means that volatility would have to increase only slightly (by ½oth) from its original 
level, not by 5 percentage points. 
Even if the stock were to drop to 90 and six months had passed, the LEAPS call 
holder would still be even if rates had iisen to 12.6% (highly unlikely) or volatility had 
risen by 70%. It is often possible for volatilities to fluctuate to that extent in six 
months, but not likely for interest rates. 
In fact, as interest rates go, only the top line of the table probably represents 
realistic interest rates; an increase of 0.4% in one month, or 3% in 6 months, is pos­
sible. The other lines, where the stock drops in price, probably require too large a 
jump in rates for rates alone to be able to salvage the call price. However, any 
increase in rates will be helpful. Volatility is another matter. It is often feasible for 
volatilities to change by as much as 50% from their previous level in a month, and 
certainly in six months. Hence, as has been stated before, the volatility factor is the 
more dominant one. 
This table shows the effect of rising interest rates and volatilities on LEAPS 
calls. It would be beneficial to the LEAPS call owner and, of course, detrimental to 
the LEAPS call seller. This is clear evidence that one should be aware of the gener­
al level of rates and volatility before using LEAPS options in a strategy.