rydad,
Compare the risk and potential reward of selling LEAPS puts to that of buying LEAPS calls. My data service is not showing anything below strike 10 for JNPR LEAPS, so let me talk about 2004JAN10 selling now for 3.80 with a delta of 20%. If you sell them, the most you can make is 3.80, and you are going to have to wait a long time to make it. That small delta is going to keep the price from falling very fast, and the time decay is very slow too. The 2003JAN10 is bidding 3.50 (I'm using best prices I see), so if JNPR just hangs around these levels you will clear .30 in a year. You could lose as much as 6.20 if JNPR fades away.
On the other hand, suppose you buy the 2004JAN10 call at 5.90 with a delta of 80%. If JNPR falls farther, you will lose some of that, but worst case you lose 5.90, no worse than the worst case for the put. If JNPR falls, you will lose value faster than with the put, but at a decreasing rate. Even if JNPR fell another $5 you would probably lose about 3.50. The best case scenario is the economy recovers, JNPR recovers, and finds its way back to say $40 where it was just a few months ago during the next year. Those calls are then worth about $43 for a tidy $37 profit, or 600%+ (and of course if you are willing to risk being called out you could sell several rounds of OTM near term calls to recoup the 5.90 you laid out to buy the LEAP). If it takes another year to get there, maybe you only get to sell for $41 or $42. Not too painful.
Which looks better to you?
Dan |
