Gaining Exposure 	 	•	 191
Value investors generally like bargains and to buy in bulk, so we 
should also buy our option time value “in bulk” by buying the longest 
tenor available and getting the lowest per-day price for it. It follows that if 
long-term equity anticipation securities (LEAPS) are available on a stock, 
it is usually best to buy one of those. LEAPS are wonderful tools because, 
aside from the pricing of time value illustrated in the preceding table, if 
you find a stock that has undervalued upside potential, you can win from 
two separate effects:
1. The option market prices options as if underlying stocks were ef-
ficiently priced when they may not be (e.g., the market thinks that 
the stock is worth $50 when it’s worth $70). This discrepancy gives 
rise to the classic value-investor opportunity.
2. As long as interest rates are low, the drift term understates the ac-
tual, probable drift of the stock market of around 10 percent per 
year. This effect tends to work for the benefit of a long-tenor call 
option whether or not the pricing discrepancy is as profound as 
originally thought.
There are a couple of special cases in which this “buy the longest 
tenor possible” rule of thumb should not be used. First, if you believe 
that a company may be acquired, it is best to spend as little on time value 
as possible. I will discuss this case again when I discuss selecting strike 
prices, but when a company agrees to be acquired by another (and the 
market does not think there will be another offer and regulatory approv-
als will go through), the time value of an option drops suddenly because 
the expected life of the stock as an independent entity has been short-
ened by the acquiring company. This situation can get complicated for 
stock-based acquisitions (i.e., those that use stocks as the currency of 
acquisition either partly or completely) because owners of the acquiree’s 
options receive a stake in the acquirer’s options with strike price adjusted 
in proportion to the acquisition terms. In this case, the time value on 
your acquiree options would not disappear after the acquisition but be 
transferred to the acquirer’s company’s options. The real point is that it 
is impossible, as far as I know, to guess whether an acquisition will be 
made in cash or in shares, so the rule of thumb to buy as little time value 
as possible still holds.