Chapter 25: LEAPS 401 
LEAPS calls may help to alleviate this problem. Since they are such long-term 
calls, they are likely to have some time value premium in them. In-the-money calls that 
have time value premium are not normally assigned. As an alternative to shorting a 
stock that is not borrowable, one might try to sell an in-the-money LEAPS call, but 
only if it has time value premium remaining. Just because the call has a long time 
remaining until expiration does not mean that it must have time value premium, as will 
be seen in the following discussion. Finally, if one does sell the LEAPS call, he must 
realize that if the stock drops, the LEAPS call will not follow it completely. As the stock 
nears the strike, the amount of time value premium will build up to an even greater 
level in the LEAPS. Still, the naked call seller would make some profit in that case, and 
it presents a better alternative than not being able to sell the stock short at all. 
Early Assignment. An American-style option is one that can be exercised at any 
time during its life. All listed equity options, LEAPS included, are of this variety. 
Thus, any in-the-money option that has been sold may become subject to early 
assignment. The clue to whether early assignment is imminent is whether there is 
time value premium in the option. If the option has no time value premium - in other 
words, it is trading at parity or at a discount then assignment may be close at hand. 
The option writer who does not want to be assigned would want to cover the option 
when it no longer carries time premium. 
LEAPS may be subject to early assignment as well. It is possible, albeit far less 
likely, that a long-term option would lose all of its time value premium and therefore 
be subject to early assignment. This would certainly happen if the underlying stock 
were being taken over and a tender off er were coming to fruition. However, it may 
also occur because of an impending dividend payment, or more specifically, because 
the stock is about to go ex-dividend. Recall that the call owner, LEAPS calls includ­
ed, is not entitled to any dividends paid by the underlying stock. So if the call owner 
wants the dividend, he exercises his call on the day before the stock goes ex-dividend. 
This makes him an owner of the common stock just in the nick of time to get the div­
idend. 
What economic factors motivate him to exercise the call? If there is any time 
value premium at all in the call, the call holder would be better off selling the call in 
the open market and then purchasing the stock in the open market as well. In this 
manner, he would still get the dividend, but he would get a better price for his call 
when he sold it. If, however, there is no time value premium in the call, he does not 
have to bother with two transactions in the open market; he merely exercises his call 
in order to buy stock. 
All well and good, but what makes the call sell at parity before expiration? It has 
to do with the arbitrage that is available for any call option. In this case, the arbitrage