22 lines
1.6 KiB
Plaintext
22 lines
1.6 KiB
Plaintext
410 Part Ill: Put Option Strategies
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increase in price. As usual, volatility has a major effect on the price of an option, and
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LEAPS are no exception. Even small changes in the volatility of the underlying com
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mon stock can cause large price differences in a two-year option. The rate of decay
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due to time is much smaller for LEAPS, since they are long-term options. Finally, the
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deltas of LEAPS calls are larger than those of short-term calls; conversely, the deltas
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of LEAPS puts are smaller.
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Several common strategies lend themselves well to the usage of LEAPS. A
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LEAPS may be used as a stock substitute if the cash not invested in the stock is
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instead deposited in a CD or T-bill. LEAPS puts can be bought as protection for
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common stock. Speculative option buyers will appreciate the low rate of time decay
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of LEAPS. LEAPS calls can be written against common stock, thereby creating a
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covered write, although the sale of naked LEAPS puts is probably a better strategy
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in most cases. Spread strategies with LEAPS may be viable as well, but the spreader
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should carefully consider the ramifications of buying a long-term option and selling
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a shorter-term one against it. If the underlying stock moves a great distance quickly,
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the spread strategy may not perform as expected.
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Overall, LEAPS are not very different from the shorter-term options to which
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traders and investors have become accustomed. Once these investors become famil
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iar with the way these long-term options are affected by the various factors that
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determine the price of an option, they will consider the use of LEAPS as an integral
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part of a strategic arsenal. |