Peter,
Is there a free site to get Delta values?
You can get all the greek parameters at the Philly exchange
fast.quote.com
But one of the concerns would be if the stock price dropped very close to setting up the position would the Leap price fall enough to keep up with the fall in the stock? If the stock took off, one would have to not take advantage of this price increase above the strike price.
Generally, the farther out you go at a given strike price for ATM to OTM, the higher the delta. So if you are looking at a call to sell when you think the price is going to drift sideways or pull back a bit, going farther out to collect the higher LEAP premium sounds like a good idea. If the price does fall, the LEAP price will fall faster than a near term call at the same strike, and of course since the premium is higher to begin with, it can fall farther. But that means you are reducing the rate of net gain if the stock goes up.
For ITM calls, delta often drops a bit as you go farther out, but may go through a minimum and rise again if you look as far out as LEAPS. The folks using the WINS approach will sell ITM calls when they think a stock is going to pull back. The nearer term ITM call has the highest delta so at least initially you get the fastest drop in the call price, but you also get very limited upside potential when you do this, and risk getting called out even if the stock does not rise. If the pull back runs farther than you hoped, you get involved in rolling down and out to maintain the protection you are after. Seems to me that having sold the longer term, higher premium, comparable delta LEAP would require less work to give you the same desired result. DELTA remains more nearly constant for the LEAP than for the nearer term call. In other words, the GAMMA (rate of change of DELTA) is less for the LEAP.
It would be interesting to make a comparison of what might have been possible with an ATM LEAP over a period of time for a stock that pulled back enough to require a couple of rounds of rolling down and out. The LEAP would have been easier, and perhaps about as effective. For a stock that is rising, selling nearer term OTM calls would probably give a better return than the OTM LEAP because you are capitalizing on more time premium, but of course you need to be sharper to keep up with things.
An example:
Buy TYC now at 39_3/8, and sell the 2001JAN50 at 6_7/8, delta = 51%, NUT = 32_1/2. If you get called out at 50, your gain is 17_1/2 or about 54% in 11 months, or 59% annually. A 15% "correction" still leaves you in the money. Compare that to a FEB40 at 2, delta = 50%, NUT = 37_7/8. If you get called out at 40, your gain is 2_1/8 or about 5.6% in one month, or 67% annually. A 15% correction is going to keep you pretty busy. Seems like a decent trade off to take the longer term approach. I think Mr Roth may be on to something.
Dan |
