Hi Flair,
The selection of strike price is always a balance of leverage and safety considerations. Since I only buy LEAPS of companies of the highest quality--growth rate, proprietary position, solid financial model, top-notch management, etc, etc.--I am willing to go out of the money, to the extent that 9 months prior to expiry, the option would become in-the-money or at least at the money.
I bought, awhile ago, VMFAL (99LEAPS call, strike price 160) more or les based upon that consideration. I expect that by Q1 of 1998, MSFT's share price will be at least $160. The "sweet spot" of option trading is the strike price near the money where the change of "delta" is the greatest, and that is the area that I don't want to miss. Although I know some folks who only buy in the money calls to reduce risk exposure.
The 9-12 months window is important to me, because during which time decay is minimal--the LEAPS can be viewed as the underlying stock in terms of risk level, yet the leverage is easily 3-4 times for a 99LEAPS. Once you arive at the 9 months threshold (prior to expiry), time decay begins to set in and accelerates in an exponential manner. Then you need to watch it vigilantly, and there is virtually no way you can guard your securities against short-term manipulations.
An excellent book, both insightful mad pragmatic, is entitled:
LEAPS: What They Are and How to Use Them for Profit and Protection
by Harrison Roth, published by Irwin Professional Publishing.
Forward by A. Chapman, chairman of OBOE.
Some of my old posts on the LU thread may also be of interest to you.
Regards,
Ibexx
PS: My LEAPS positions are not stand-alone investments. They are, in a way, used as a hedge for my longs. For example, I buy LEAPS calls at a short- or intermediate bottom, while selling or shorting (against the box the calls at a short- or intermediate top. |
