So the same $ amount of those options is 4 x 322/300 or over 6 times the leverage of the common.
Actually, Jill, in response to a PM, I realized that I was performing the mathematical equivalent of comparing apples and Fruit Loops. Here's another attempt, using tonight's closing prices:
Q at 156; Jan 2001 200 LEAP call selling for about @ 36.5
Assume Q has doubled from today's price on 1/5/2001
Common will be worth 312; net gain of (duh) 156.
Option will be worth ~112.50, net gain of 112.50-36.50=$76.
But stock costs 156/36.5=4.27 times what the option does, so option leverage is 76/156 = .487 x 4.27 = 2.08.
Now assume Q has tripled from today's price on 1/5/2001
Common will be worth 468; net gain of 312.
Option will be worth ~268.50, net gain of 268.50-36.50=$232.
So option leverage is 232/312 = .744 x 4.27 = 3.175.
Now assume Q only goes to 190 by 1/5/2001
Common will be worth 190 for a gain of $44.
Option will be nearly worthless, loss of about $35.
Leverage comes at a price.
As you can see, playing with OTM options, calculations of leverage depend greatly on your expectations for the stock's future value. That's why I use that spreadsheet I posted to help determine the "ROI" value of a series of calls or puts.
-Rose- |
