36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
Chapter 25: LEAPS 409
|
||
Thus, a neutral backspread involving LEAPS requires buyingfewer calls than a neu
|
||
tral backspread involving a 6-rnonth option on the long side. This is because the delta
|
||
of the LEAPS call is larger. The significant point here is that, because of the time
|
||
value retention of the LEAPS call, even when the stock moves higher, it is not nec
|
||
essary to buy as many. If one does not use the deltas, but merely figures that 3 to 2
|
||
is a good ratio for any diagonal backspread, then he will be overly bullish if he uses
|
||
LEAPS. That could cost him if the underlying stock declines.
|
||
Calendar Spreads. LEAPS may also be used in calendar spreads - spreads in
|
||
which the striking price of the longer-term option purchased and the shorter-term
|
||
option sold are the same. The calendar spread is a neutral strategy, wherein the
|
||
spreader wants the underlying stock to be as close as possible to the striking price
|
||
when the near-term option expires. A calendar spread has risk if the stock moves too
|
||
far away from the striking price (see Chapters 9 and 22). Purchasing a LEAPS call
|
||
increases that risk in terms of dollars, not percentage, because of the larger debit that
|
||
one must spend for the spread.
|
||
Simplistically, calendar spreads are established with equal quantities of options
|
||
bought and sold. This is often not a neutral strategy in the true sense. As was shown
|
||
in Chapter 9 on call calendar spreads, one may want to use the deltas of the two
|
||
options to establish a truly neutral calendar spread, particularly if the stock is not ini
|
||
tially right at the striking price. Out-of-the-money, one would sell more calls than he
|
||
is buying. Conversely, in-the-money, one would buy more calls than he is selling.
|
||
Both strategies statistically have merit and are attractive. When using LEAPS deltas
|
||
to construct the neutral spread, one need generally buy fewer calls than he might
|
||
think, because of the higher delta of a LEAPS call. This is the same phenomenon
|
||
described in the previous example of a diagonal backspread.
|
||
SUMMARY
|
||
LEAPS are nothing more than long-term options. They are usable in a wide variety
|
||
of strategies in the same way that any option would be. Their margin and investment
|
||
requirements are similar to those of the more familiar equity options. Both LEAPS
|
||
puts and calls are traded, and there is a secondary market for them as well.
|
||
There are certain differences between the prices of LEAPS and those of short
|
||
er-term options, but the greatest is the relatively large effect that interest rates and
|
||
dividends have on the price of LEAPS, because LEAPS are long-term options.
|
||
Increases in interest rates will cause LEAPS to increase in price, while increases in
|
||
dividend payout will cause LEAPS calls to decrease in price and LEAPS puts to |