Mark,
I appreciate your question and it is appropriate. If Intel goes up $1 today, the Black Schoeles model says the price of the leap goes to $3.50. That is a 21% gain on $2.90. If Intel goes to $30 by January of 2008, then you have $7.50 of intrinsic value and no time value left. $7.50/$2.90 is a 159% return. Combinations vary by time and price.
If Intel drops to $19/sh today ($1.80 drop), the value of the leap drops to $1.96 per contract, or 32%. Conversely if it goes up by $1.80 today the price goes to $4.02 or up by 39%.
I find it attractive that you have lots of time, a small amount of capital committed to the trade, and lots of leverage because, and this is important, the premium on the leap is relatively low at 24.9%. I have recently advocated selling puts on UBB because the premium there is high -- over 40%. The thought is to sell high premium and buy cheap premium when the stock is this oversold, the bounce, even if only a point, can give you a great return. Timing it is key though because it cuts both ways. Keeping your horizon in mind and stops is a must. Good luck.
Hope this helps.
Best regards, |
