Barron's has an interesting article on the effects of declining volatility on the price of LEAPs. The last paragraph discusses, only briefly, writing calls. Not much help, but interesting.
interactive.wsj.com
LEAPS Lose Luster
By Erin E. Arvedlund
Is Wall Street witnessing a permanent stock-market shift to lower volatility? Heavy convertible-debt issuance, the technology bubble's collapse and slim expectations for a big rally may doom stocks and indexes to that fate. Many options have grown cheap lately as a result.
Take LEAPS options. "I'd be somewhat hesitant to buy LEAPS," says Kenneth Nakayama, managing director at Deutsche Banc Alex. Brown.
Though they are cheaper in the past few months, could they lose more value from here? Introduced in 1990, LEAPS -- the acronym is derived from "Long-term Equity AnticiPation Securities" -- are simply longer-term options with expirations of up to three years. For more information on LEAPS and related strategies, visit the Options Industry Council's Web- site, www.888options.com.
For investors committed to playing the market by buying options, Nakayama recommends sticking with shorter-dated instruments. In particular, July- and August-dated options on bank and brokerage stocks are beginning to look attractive ahead of this week's Fed meeting.
What about selling options for extra income? "It's a tough time to be a seller," he notes. "Option volatilities have fallen so much that that you're only paid modestly for writing options." That said, call overwriting volumes have generally been higher over the past few months, driven by investors who feel the market is range-bound and unlikely to rally significantly. |
