38 lines
2.6 KiB
Plaintext
38 lines
2.6 KiB
Plaintext
374 Part Ill: Put Option Strategies
|
||
Second, the figures depict the change in rates or dividends as being instantaneous.
|
||
This is not completely realistic. If rates change, they will change by a little bit at a time,
|
||
usually¼% or½% at a time, perhaps as much as 1 %. If dividends are increased, that
|
||
increase may be instantaneous, but it will not likely occur immediately after the
|
||
LEAPS are purchased or sold. However, the point that these figures are meant to con
|
||
vey is that interest rates and dividends have a much greater effect on LEAPS than on
|
||
ordinary shorter-term equity options, and that is certainly a true statement.
|
||
COMPARING LEAPS AND SHORT-TERM OPTIONS
|
||
Table 25-1 will help to illustrate the problem in valuing LEAPS, either mentally or
|
||
with a model. All of the variables - stock price, volatility, interest rates, and dividends
|
||
- are given in increments and the comparison is shown between 3-month equity
|
||
options and 2-year LEAPS. There are three sets of comparisons: for options 20% out
|
||
of-the-money, options at-the-money, and options 20% in-the-money.
|
||
A few words are needed here to explain how volatility is shown in this table.
|
||
Volatility is normally expressed as a percent. The volatility of the stock market is
|
||
about 15%. The table shows what would happen if volatility changed by one per
|
||
centage point, to 16%, for example. Of course, the table also shows what would hap
|
||
pen if the other factors changed by a small amount.
|
||
Most of the discrepancies between the 3-month and the 2-year options are
|
||
large. For example, if volatility increases by one percentage point, the 3-month out
|
||
of-the-money call will increase in price by only 3 cents (0.03 in the left-hand column)
|
||
while the 2-year LEAPS call will increase by 43 cents. As another example, look at
|
||
the bottom right-hand pair of numbers, which show the effect of a dividend increase
|
||
on the options that are 20% in-the-money. The assumption is that the dividend will
|
||
increase 25 cents this quarter (and will be 25 cents higher every quarter thereafter).
|
||
This translates into a loss of 14 cents for the 3-month call, since there is only one ex
|
||
dividend period that affects this call; but it translates into a loss of 1 ½ for the 2-year
|
||
LEAPS, since the stock will go ex-dividend by an extra $2 over the life of that call.
|
||
TABLE 25-1.
|
||
Comparing LEAPS and Short-Term Calls.
|
||
Change in Price of the Options
|
||
20% out at 20% in
|
||
Variable Increment 3-mo. 2-yr. 3-mo. 2-yr. 3-mo. 2-yr .
|
||
Stock Pre. + 1 pt . 03 .41 .54 .70 .97 .89
|
||
Volatility + 1% .03 .43 .21 .48 .04 .33
|
||
Int. Rate + 1/2% .01 .27 .08 .55 .14 .72
|
||
Dividend + $.25/qtr 0 -.62 -.08 -1.18 -.14 -1.50 |