LEAPS Trading Strategies by Marty Kearney

Author:Marty Kearney
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-09-22T00:00:00+00:00

If the stock rises from $39 to $45 in 60 days, what will the call price be?

Online Tools

It doesn’t hurt to know the delta when you’re trading these LEAPS options. The Options Industry Council (OIC) offers free calculation and other tools on their Web site: www.optionseducation.org. For help calculating delta, look for the “Options Investigator” under Trading Tools.

If the stock goes from $39 to $45 in the next 60 days (assuming interest rates and volatility have not changed, and there is still no dividend), this option should go from somewhere around $14 to about $18.70. It would have done fairly well at that point, up $4.70. I would make $4.70 as opposed to $6.00 if I owned the stock instead. But, look at what my investment was. Rather than risking $39 and making $6 (a 15% profit), I risked $14 to make $4.70 (a 33% return). So percentage-wise, I did twice as well owning the LEAPS call.

In dollars and cents, I would have done better owning the stock, but two points have to be remembered. First, the percentage return means more because it summarizes the use of money. (For example, I could have bought two calls and made more on a dollars-and-cents basis.) Second, with the option my risks are lower. If this stock had fallen in value, my losses could potentially be huge. But by investing in the option, I can’t lose more than the cost of the option, even if the stock plummets.

So there’s a trade off. That particular stock only started out with the first dollar move, when it moved from $39 to $40. The option only went up about $0.81 because the delta was in effect. There was not a dollar-for-dollar movement in the option. But as the stock price continues to move in the same direction, and as expiration gets closer, the delta moves higher, approaching 100.

There’s a trade off here. Let Marty help you figure out which is best for you at www.traderslibrary.com/TLEcorner.

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