37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
390 Part Ill: Put Option Strategies
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The LEAPS put delta curve is flat, just as the call delta curve was. Moreover,
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the delta is not very large anywhere across the figure. For example, at-the-money 2-
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year LEAPS puts move only about 30 cents for a one-point move in the underlying
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stock. LEAPS put buyers who want to speculate on a stock's downward movement
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must realize that the leverage factor is not large; it takes approximately a 3-point
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move by the underlying common for an at-the-money LEAPS put to increase in
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value by one point. Long-term puts don't mirror stock movement nearly as well as
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shorter-term puts do.
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In summary, the option buyer who is considering buying LEAPS puts or calls as
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speculation should be aware of the different price action that LEAPS exhibit when
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compared to shorter-term options. Due to the large amount of time that LEAPS have
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remaining in their lives, the time decay of the LEAPS options is smaller. For this rea
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son, the LEAPS option buyer doesn't need to be as precise in his timing. In general,
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LEAPS calls move faster when the underlying stock moves, and LEAPS puts move
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more slowly. Other than that, the general reasons for speculative option buying apply
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to LEAPS as well: leverage and limited risk.
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SELLING LEAPS
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Strategies involving selling LEAPS options do not differ substantially from those
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involving shorter-term options. The discussions in this section concentrate on the two
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major differences that sellers of LEAPS will notice. First, the slow rate of time decay
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of LEAPS options means that option writers who are used to sitting back and watch
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ing their written options waste away will not experience the same effect with LEAPS.
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Second, follow-up action for writing strategies usually depends on being able to buy
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back the w1itten option when it has little or no time value premium remaining. Since
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LEAPS retain time value even when substantially in- or out-of-the-money, follow-up
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action involving LEAPS may involve the repurchase of substantial amounts of time
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value premium.
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COVERED WRITING
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LEAPS options can be sold against underlying stock just as short-term options can.
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No extra collateral or investment is required to do so. The resulting position is again
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one with limited profit potential, but enhanced profitability (as compared to stock
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ownership), if the underlying stock remains unchanged or falls. The maximum prof
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it potential of the covered write is reached whenever the underlying stock is at or
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above the striking price of the written option at expiration.
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The LEAPS covered writer takes in substantial premium, in terms of price,
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when he sells the long-term option. He should compare the return that he could |