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Strategies & Market Trends : The ultimate play:STRADDLES on earnings announcements.
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To: Chris Baker who wrote (58)8/6/1996 3:14:00 AM
From: Nathan L.   of 140
 
Hi everyone-

I have been looking to increase the performance of some of my stocks by using certain option stratagies. I have a fairly substantial investment in Intel stock and want to leverage it using LEAPS. I owned the Jan98 90 calls earlier this year @ $3 and sold them too early @ $6. I couldn't resist locking in 100%. But now those same contracts sell for about $10.

One question i have deals with how time value is assigned to each contract. Looking through last Saturday's issue of Barron's, i notice a trend in the Intel LEAP calls. It seems that the further into the money the LEAP is, the less premium it carries. Here is an example: (these prices are as of Friday's close)

Intel closing stock price: $78 3/4

Intel Jan98 40 call: $42 1/4 ($3.50 premium)
Intel Jan98 55 call: $30 3/8 ($6.63 premium)
Intel Jan98 60 call: $26 1/4 ($7.50 premium)
Intel Jan98 70 call: $19 5/8 ($10.8 premium)
Intel Jan98 80 call: $14 ($15.25 premium)
Intel Jan98 90 call: $10 ($21.25 premium)

For sake of arguement, lets assume Intel ends 1996 at $100/share. Without accounting for time depreciation, the Jan98 40 calls should trade for about $60 (i simply added $20 to the roughly $40 they ask now because they will be $20 further into the money.)

Now to figure what the cost of the Jan98 90 calls would be if Intel reaches $100/share by years end, i did the following:

The Jan98 80 calls are currently the closest to being at-the-money and trade for $14. So it is safe to assume that when Intel's stock price reaches $90, the Jan98 90 calls will be at-the-money and should be asking around $14 also. Then when Intel reaches $100, those Jan98 90 calls will be $10 into-the-money and should trade around $24.

This being true, it seems much smarter to buy the Jan98 90 calls instead of the Jan98 40's. With the 90's you gain about 150%, but with the 40's the gain is limited to only about 50%.

Basically what i'm trying to figure out is which is better: buying in-the-money calls or out-of-the-money calls? Should i focus on the 1998 Intel calls or go with the 1999's (example: Jan99 100 trades for about $12) Betting that Intel will be above $100 well before January 1999 seems like a no-brainer to me.

Any thoughts on what i have written above or am i totally nuts??? Is anyone else using LEAPS to capitalize on Intel's long term growth potential. If so, how are you doing it (which LEAP & why.) Thank you to all replies in advance.
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