38 lines
2.6 KiB
Plaintext
38 lines
2.6 KiB
Plaintext
374 Part Ill: Put Option Strategies
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Second, the figures depict the change in rates or dividends as being instantaneous.
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This is not completely realistic. If rates change, they will change by a little bit at a time,
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usually¼% or ½% at a time, perhaps as much as 1 %. If dividends are increased, that
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increase may be instantaneous, but it will not likely occur immediately after the
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LEAPS are purchased or sold. However, the point that these figures are meant to con
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vey is that interest rates and dividends have a much greater effect on LEAPS than on
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ordinary shorter-term equity options, and that is certainly a true statement.
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COMPARING LEAPS AND SHORT-TERM OPTIONS
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Table 25-1 will help to illustrate the problem in valuing LEAPS, either mentally or
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with a model. All of the variables - stock price, volatility, interest rates, and dividends
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- are given in increments and the comparison is shown between 3-month equity
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options and 2-year LEAPS. There are three sets of comparisons: for options 20% out
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of-the-money, options at-the-money, and options 20% in-the-money.
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A few words are needed here to explain how volatility is shown in this table.
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Volatility is normally expressed as a percent. The volatility of the stock market is
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about 15%. The table shows what would happen if volatility changed by one per
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centage point, to 16%, for example. Of course, the table also shows what would hap
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pen if the other factors changed by a small amount.
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Most of the discrepancies between the 3-month and the 2-year options are
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large. For example, if volatility increases by one percentage point, the 3-month out
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of-the-money call will increase in price by only 3 cents (0.03 in the left-hand column)
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while the 2-year LEAPS call will increase by 43 cents. As another example, look at
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the bottom right-hand pair of numbers, which show the effect of a dividend increase
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on the options that are 20% in-the-money. The assumption is that the dividend will
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increase 25 cents this quarter ( and will be 25 cents higher every quarter thereafter).
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This translates into a loss of 14 cents for the 3-month call, since there is only one ex
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dividend period that affects this call; but it translates into a loss of 1 ½ for the 2-year
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LEAPS, since the stock will go ex-dividend by an extra $2 over the life of that call.
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TABLE 25-1.
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Comparing LEAPS and Short-Term Calls.
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Change in Price of the Options
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20% out al 20% in
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Variable Increment 3-mo. 2-yr. 3-mo. 2-yr. 3-mo. 2-yr.
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Stock Pre. + 1 pt .03 .41 .54 .70 .97 .89
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Volatility + 1% .03 .43 .21 .48 .04 .33
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Int. Rate + 1/2% .01 .27 .08 .55 .14 .72
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Dividend + $.25/qtr 0 -.62 -.08 - l.18 -.14 -1.50 |