37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
Chapter 25: LEAPS 375
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The table also shows that only three of the discrepancies are not large. Two
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involve the stock price change. If the stock changes in price by 1 point, neither the at
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the-money nor the in-the-money options behave very differently, although the at-the
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money LEAPS do jump by 70 cents. The observant reader will notice that the top line
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of the table depicts the delta of the options in question; it shows the change in option
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price for a one-point change in stock price. The only other comparison that is not
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extremely divergent is that of volatility change for the at-the-money option. The 3-
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month call changes by 21 cents while the LEAPS changes by nearly ½ point. This is
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still a factor of two-to-one, but is much less than the other comparisons in the table.
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Study the other comparisons in the table. The trader who is used to dealing with
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short-term options might ordinarily ignore the effect of a rise in interest rates of ½
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of 1 %, of a 25-cent increase in the quarterly dividend, of the volatility increasing by
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a mere 1 %, or maybe even of the stock moving by one point (only if his option is out
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of-the-money). The LEAPS option trader will gain or suffer substantially and imme
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diately if any of these occur. In almost every case, his LEAPS call will gain or lose ½
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point of value - a significant amount, to be sure.
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LEAPS STRATEGIES
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Many of the strategies involving LEAPS are not significantly different from their
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counterparts that involve short-term options. However, as shown earlier, the long
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term nature of the LEAPS can sometimes cause the strategist to experience a result
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different from that to which he has become accustomed.
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As a general rule, one would want to be a buyer of LEAPS when interest rates
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were low and when the volatilities being implied in the marketplace are low. If the
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opposite were true (high rates and high volatilities), he would lean toward strategies
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in which the sale of LEAPS is used. Of course, there are many other specific consid
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erations when it comes to operating a strategy, but since the long-term nature of
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LEAPS exposes one to interest rate and volatility movements for such a long time,
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one may as well attempt to position himself favorably with respect to those two ele
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ments when he enters a position.
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LEAPS AS STOCK SUBSTITUTE
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Any in-the-money option can be used as a substitute for the underlying stock. Stock
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owners may be able to substitute a long in-the-money call for their long stock. Short
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sellers of stock may be able to substitute a long put for their short stock. This is not
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a new idea; it was discussed briefly in Chapter 3 under reasons why people buy calls.
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It has been available as a strategy for some time with short-term options. Its attrac
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tiveness seems to have increased somewhat with the introduction of LEAPS, howev- |