34 lines
1.4 KiB
Plaintext
34 lines
1.4 KiB
Plaintext
388 Part Ill: Put Option Strategies
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FIGURE 25-5.
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Call delta comparison, 2-year LEAPS versus 3-month equity options.
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90
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80
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70
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g 60
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; 50
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~
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O 40
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30 t= 3 months
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20
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10
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O 70 80 90 100 110 120 130
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Stock Price
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Example: XYZ is trading at 82. There are 3-month calls with strikes of 80 and 90, and
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there are 2-year LEAPS calls at those strikes as well. The following table summarizes
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the available information:
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XYZ: 82 Date: January, 2002
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Option Price Delta
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April ('02) 80 call 4 s/a
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April ('02) 90 call 1 i/s
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January ('04) 80 LEAPS call 14 3/4
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January ('04) 90 LEAPS call 7 1/2
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Suppose the trader expects a 3-point move by the underlying common stock, from 82
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to 85. Ifhe were analyzing short-term calls, he would see his potential as a gain of F/s
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in the April 80 call versus a gain of 3/s in the April 90 call. Each of these gains is pro
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jected by multiplying the call's delta times 3 (the expected stock move, in points).
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Thus, there is a large difference behveen the expected gains from these two options,
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particularly after commissions are considered.
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Now observe the LEAPS. The January 80 would increase by 2¼ while the
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January 90 would increase by 1 ½ if XYZ moved higher by 3 points. This is not near
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ly as large a discrepancy as the short-term options had. Observe that the January 90
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LEAPS sells for half the price of the January 80. These movements projected by the |