Comments on: LEAPS vs. Stocks: An Investment Vehicle Throwdown

By: Dennis Segerson

Dennis Segerson — Thu, 14 Jan 2010 12:08:27 +0000

Does anyone at the Oxford Club teach options? If so how much is the course.

By: Douglas Pereira

Douglas Pereira — Sun, 13 Sep 2009 22:32:22 +0000

Mr Skouros,

Because the price of the LEAP is equal to the share price minus the strike price. So if the stock price is 65, and the strike price is 50, the options would be worth at least $15/share. Since they were bought at $6/share, the profit is ($15-$6)/$6, or 150%.

But, in the real world, option prices are also determined by volatility, which can make the options worth a lot more, or a lot less.

That is why professionals quote prices in terms of volatility, ie “I bought this call at 25%, and I sold it at 45%”. Since option professionals aren’t aiming to make directional predictions, they hedge their positions, so quoting in terms of volatility reflects the actual cost of their position, ie a call option is trading at $1.50 with the underlier trading at $42.05. The implied volatility of the option is determined to be 18.0%. A short time later, the option is trading at $2.10 with the underlier at $43.34, yielding an implied volatility of 17.2%. Even though the option’s price is higher at the second measurement, it is still considered cheaper on a volatility basis. This is because the underlier needed to hedge the call option can be sold for a higher price.

Hope this help,
Douglas

By: Gord Campbell

Gord Campbell — Sat, 12 Sep 2009 17:42:21 +0000

In the given example, the LEAPs approach only gained $210,000, while the stocks gained $300,000. Karim didn’t buy enough LEAPs!

He should put $200,000 into LEAPs and $800,000 into fixed income. That way he makes more than $300,000, but not much more. And he’s risking $32,000 less.

If 12% is realistic…

By: John B Egan

John B Egan — Thu, 10 Sep 2009 05:08:47 +0000

My experience is that it is very difficult in a rising market to buy ATM LEAP with 2 years time value for 12% of the underlying value (ie $6 on a $50 stock). Can you give a real example. Thanks.

By: Mr. Smith

Mr. Smith — Thu, 10 Sep 2009 02:41:01 +0000

I’m impressed. I’ve heard about LEAPS and the less money that’s needed but I need to know more.
I need a course on trading LEAPS.

By: Thomas Skouros

Thomas Skouros — Wed, 09 Sep 2009 17:27:32 +0000

One thing I dont understand how did the leaps go from 6 to $15 150% increase Whereas the stock went up 30%. Why wouldnt the leaps also go up 30%? Tom Skouros

By: Raymond Masse

Raymond Masse — Wed, 09 Sep 2009 12:27:03 +0000

If the underlying stock jumps in price, and the time horizon remains the same (say two years), a leap can be used for selling covered calls. The premium received can actually reduce the risk related to the investment. So, it is wise to monitor the held leaps, and use them as a potential candidates for this strategy. The other side of the coin is that, for stocks that pay a good dividends, you’re not allowed to receive them. If regular income is a concern, this strategy is less interesting.