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Non-Tech : The Critical Investing Workshop
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To: Uncle Frank who wrote (8253)3/20/2000 12:15:00 PM
From: Eylon  Read Replies (1) of 35685
 
There's more to options than meets the eye, Eylon. Take a look at the following rtq ask prices for 2 qcom ITM options:

yqjae (Jan 2002 125 strike LEAPS calls) = 53 3/8
wijat (Jan 2002 100 strike LEAPS calls) = 63 1/8

Hello Uncle,

Lets review the whole thing again:

I claimed that the most you can get from selling Covered Call is the total time premium. If we take your two examples assuming that QCOM price at the time was $131 (and lets round the numbers).

The total time premium for the first call is 53-(131-125)=$47
The total time premium for the second call is 63-(131-100)=$32
The difference between the time premium is the $15 you asked about.

If we wait for Jan02 the most we can get is the time premium (if QCOM is on or above the strike).

If we buy the call before Jan02, most of the time (my guess is 99% of the time) we will make less than the time premium. The only case where you can make more is if the volatility will drop drastically. Notice that the volatility for long time LEAPS is usually less than the volatility for the short term option, QCOM volatility for April is about 75% and for Jan02 about 66%, So it is very hard to make more than the time premium.

And BTW I still use the computer program I once wrote to compute the Black-Scholes option value, so I don't need the hint.

Eylon
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