47 lines
1.7 KiB
Plaintext
47 lines
1.7 KiB
Plaintext
Chapter 25: LEAPS
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FIGURE 25-3.
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LEAPS call pricing curve as dividends increase.
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30
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25
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(I)
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.g 20
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0..
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C:
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:g_ 15
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0
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10
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5
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0
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70 80 90 100
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Stock Price
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With
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Current
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Dividend
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110
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373
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Dividend
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)> Increases
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$1
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T Increases
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$2
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120
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The actual amount that the LEAPS calls lose in price increases slightly as the
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call is more in-the-money. That is, the curves are closer together on the left-hand
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(out-of-the-money) side than they are on the right-hand (in-the-money) side. For the
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in-the-money call, a $1 increase in dividends over two years can cause the LEAPS to
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be worth about 1 ½ points less in value.
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Figure 25-3 is to the same scale as Figure 25-2, so they can be compared direct
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ly in terms of magnitude. Notice that the effect of a $1 increase in dividends on the
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LEAPS call prices is much smaller than that of an increase in interest rates by 3%.
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Graphically speaking, one can observe this by noting that the spaces between the
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three curves in the previous figure are much wider than the spaces between the three
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curves in this figure.
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Finally, note that dividend increases have the opposite effect on puts. That is,
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an increase in the dividend payout of the underlying common will cause a put to
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increase in price. If the put is a long-term LEAPS put, then the effect of the increase
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will be even larger.
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Lest one think that LEAPS are too difficult to price objectively, note the follow
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ing. The prior figures of interest rate and dividend effects tend to magnify the effects
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on LEAPS prices for two reasons. First, they depict the effects on 2-year LEAPS. That
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is a large amount of life for LEAPS. Many LEAPS have less life remaining, so the
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effects would be diminished somewhat for LEAPS with 10 to 23 months of life left. |