re DELL LEAPs
I don't understand! If you buy 100 DELL @ $110 ($11,000) how can you pay $4500 and $3500 for your Jan 2000 and Jan 1999 leaps? ( Was that supposed to be $450 and $350 respectively?) Seems like it adds up to more that $12K!
K.M.
First of all, the disclaimer: I am not a specialist or an expert on options or, specifically, LEAPs. Furthermore, many investors may not be able to trade them due to brokerage restraints on their accounts. Many brokerage houses do not allow option trading in IRA accounts and I am sure that all of them require a specific application and approval to do option trading in any account. In addition, options are considered to be riskier than pure equities, so they may not be an appropriate vehicle for a particular investor.
That said, here are Friday's closing prices:
DELL: 110.875
DELL JAN 90 (1999) LEAP (VDQAR): 34.125
DELL JAN 100 (1999) LEAP (VDQAT): 28.75
DELL JAN 90 (2000) LEAP (LDEAR): 45.00
DELL JAN 110 (2000) LEAP (LDEAB): 35.50
Assume that you are intending to invest $12K and have decided that DELL offers you the best potential for increase, then you might buy -
100 shares of DELL for $11,075, or
3 contracts of the VDQAR (Jan 1999 strike 90) for $10,250, or
4 contracts of the VDQAT (Jan 1999 strike 100) for $11,400, or
3 contracts of the LDEAR (Jan 2000 strike 90) for $13,500, or
3 contracts of the LDEAB (Jan 2000 strike 110) for $10,650.
(example only, there are other strikes available.)
There is increased risk in buying the options -- assuming that you do not sell your options prior to expiration, if (Hank turns out to be right and) the stock goes to $60 and stays there for 1 year, you lose all your money if you bought the 1999 LEAPs. If it stays there for two years, you would lose all your money if you bought the 2000 LEAPs. In order to make money with your Call LEAPs, the price of the underlying equity must go up. So before you purchase them, you need to decide where you think DELLs stock price will be 1 or two years from now. If you think, FOR EXAMPLE, that DELL will be trading at $150 per share sometime prior to JAN 99, then your profit would be: ~$3,925 if you bought the stock;
~$7,762 if you bought the 3 JAN 1999 90s
~$8,500 if you bought the 4 JAN 1999 100s.
To calculate your potential profit
1. take your 'target price' for the stock,
2. subtract the strike price of the option,
3. deduct the premium you paid,
4. multiply by the number of contracts bought.
Please note that a) I have not included brokerage fees in any of my calculations, and b) that any option retains some time value until expiration, which I have also not included, because it is primarily a function of time remaining.
I highly recommend William Spaulding's home page if you are interested in studying and learning more about options and leaps.
Hope this helps, DELLish, 3 |
