36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
Chapter 25: LEAPS 369
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Striking Price. There is no standardized striking price interval for LEAPS as
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there is for equity options. If XYZ is a 95-dollar stock, there might be LEAPS with
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striking prices of 80, 95, and 105. Again, one must look in the newspaper, ask his bro
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ker, or check the Internet (www.cboe.com) to determine the actual LEAPS striking
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prices for any specific underlying stock. New striking prices can be introduced when
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the underlying stock rises or falls too far. For example, if the lowest strike for XYZ
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were 80 and the stock fell to 80, a new LEAPS strike of 70 might be introduced.
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Other Basic Factors. LEAPS may be exercised at any time during their life,
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just as is the case with equity options. Note that this statement regarding exercise is
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not necessarily true for Index LEAPS or Index Options. See Part V of this book for
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discussions of index products.
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Standard LEAPS contracts are for 100 shares of the underlying stock, just as
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equity options are. The number of shares would be adjusted for stock splits and stock
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dividends (leading to even more arcane LEAPS symbol problems). LEAPS are quot
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ed on a per-share basis, as are other listed options.
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There are position and exercise limits for LEAPS just as there are for other list
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ed options. One must add his LEAPS position and his regular equity option position
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together in order to determine his entire position quantity. Exemptions may be
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obtained for bona fide hedgers of common stock.
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As time passes, LEAPS eventually have less than 9 months remaining until expi
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ration. When such a time is reached, the LEAPS are "renamed" and become ordi
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nary equity options on the underlying security.
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Example: Assume LEAPS on stock XYZ were initially issued to expire two years
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hence. Assume that one of these LEAPS is the XYZ January 90; that is, it has a strik
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ing price of 90 and expires in January, two years from now. Its symbol is WXYAR
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(WXY being the LEAPS base symbol assigned by the exchange where XYZ is traded,
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A for January, and R for 90).
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Fifteen months later, the January LEAPS only have 9 months of life remaining.
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The LEAPS symbol would be changed from WXYAR to XYZAR (a regular equity
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option), and the quotes would be listed in the regular equity option section of the
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newspaper instead of in the LEAPS section.
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PRICING LEAPS
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Terms such as in-the-money, out-of-the-money, intrinsic value, time value premium,
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and parity all apply and have the same definitions. The factors influencing the prices
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of LEAPS are the same as those for any other option: |