44 lines
2.2 KiB
Plaintext
44 lines
2.2 KiB
Plaintext
386 Part Ill: Put Option Strategies
|
||
TABLE 25-3.
|
||
Factors necessary for January 2-year LEAPS to be = 14.
|
||
Stock price After l month
|
||
100 (unchanged) r = 3 .4% or
|
||
V + 5%
|
||
95
|
||
90
|
||
r = 6% or
|
||
V + 20%
|
||
r = 8.5% or
|
||
V + 45%
|
||
After 6 months
|
||
r = 6% or
|
||
V + 20%
|
||
r = 9.4% or
|
||
V + 45%
|
||
r = 12.6% or
|
||
V + 70%
|
||
to go in order to keep the value of the LEAPS call at 14 even after the indicated
|
||
amount of time had expired.
|
||
To demonstrate the use of this table, suppose the stock price were 100
|
||
(unchanged) after one month. If interest rates had 1isen to 3.4% from their original
|
||
level of 3% during that time, the call would still be worth 14 even though one month
|
||
had passed. Alternatively, if rates were the same, but volatility had increased by only
|
||
5% from its original level, then the call would also still be worth 14. Note that this
|
||
means that volatility would have to increase only slightly (by ½oth) from its original
|
||
level, not by 5 percentage points.
|
||
Even if the stock were to drop to 90 and six months had passed, the LEAPS call
|
||
holder would still be even if rates had iisen to 12.6% (highly unlikely) or volatility had
|
||
risen by 70%. It is often possible for volatilities to fluctuate to that extent in six
|
||
months, but not likely for interest rates.
|
||
In fact, as interest rates go, only the top line of the table probably represents
|
||
realistic interest rates; an increase of 0.4% in one month, or 3% in 6 months, is pos
|
||
sible. The other lines, where the stock drops in price, probably require too large a
|
||
jump in rates for rates alone to be able to salvage the call price. However, any
|
||
increase in rates will be helpful. Volatility is another matter. It is often feasible for
|
||
volatilities to change by as much as 50% from their previous level in a month, and
|
||
certainly in six months. Hence, as has been stated before, the volatility factor is the
|
||
more dominant one.
|
||
This table shows the effect of rising interest rates and volatilities on LEAPS
|
||
calls. It would be beneficial to the LEAPS call owner and, of course, detrimental to
|
||
the LEAPS call seller. This is clear evidence that one should be aware of the gener
|
||
al level of rates and volatility before using LEAPS options in a strategy. |