Sean,
Leaps - Long term Equity AnticiPation Securities. Just another name for a long term option - with an expiration a year or more away.
>>Why would you not buy 100 contracts of VNLAB at 2.5 as opposed to 15 contracts of LNLAP at 17?
It depends on the risk you want to take. Since LNLAP expires in 2000, there is more time for INTC to rise above the strike + premium. VNLAB expires in 1999, so it is more risky. The short term options have the most risk.
Ask yourself: 1) For VNLAB, will INTC be at $110+2 3/4 in Jan 1999? 2) For LNLAP, will INTC be at $80+$17 3/4 in Jan 2000? Even if the answer is "NO", they might still be profitable if you know when to sell.
>>Another question, typically how much does an option price move per dollar rise in the stock price a) when the call price has not been reached, b) when the call price has been reached.
The Black-Scholes mathematical model can be used to estimate option prices, but supply and demand is also a factor. For each dollar the stock moves, the option price will generally move some fraction in the same direction.
You can get a feel for this by looking at the difference in price between the different strikes. For instance:
APR 75 = 4 7/8
APR 80 = 2 1/4
For each dollar INTC rises, the option price rises about $0.50. Notice that this "delta" changes as the stock price moves away from the strike price. Look at many option prices to get a feel for how they react to the stock.
>>Also shouldn't the price of an option plus it's call value be equal to the current stock price plus some premium. In the recent intel stock rally I saw some calls (50 for Jan 99) valued at about 30 dollars when the stock was trading at 94/95.
Assuming "call value" means "strike price", the answer is: Yes, but - VNLAV, and many of the others have not been trading for a while. You could be looking at a price that is over a year old. If the volume for the option you are looking at is zero, you are looking at an old price. Of course, you can always put a bid in for one if you want.
>>is it sensible to trade on the options volatility?
Yes - as long as you know what you are doing and understand the risks involved. This is America after all!
Good luck,
The Winsurfer |
