LEAP numbers:
Just spent some time on the CBOE site. Some thoughts:
1. For AMAT 1/2001 40 calls, the bid/ask is 9 1/8-10 1/8. The spread is 1, which is 9.9% of the ask. That's like buying a mutual fund with a 9.9% front-end load. Pretty steep. For Intel, the 1/2001 100 calls are 12.5-13. That's a 3.8% load, better but still much higher than if you trade the underlying stock. I suppose the difference is because INTC is a more liquid stock. It means there is no point in trying to day-trade them, the spread will eat all your profits, it's only worthwhile if you hold them a long time. I wonder, if I put in a large order, with a limit buy order half-way betwwen the bid and ask, would it clear?
2. For AMAT, the January 40 calls expiring in 1999, 2000, and 2001 are priced at 3.125, 6.75, and 10.125. Given the 2.67 years to expiration, that means you're paying 3.8$ per year for all of AMAT's appreciation over 40. 3.8/33=11.5%. Seems like a deal to me, as AMAT has a record of appreciating much faster than 11.5% per year.
3. For INTC, the January 100 calls expiring in 1999, 2000, and 2001 are priced at 2.25, 8, and 13. The cost is 4.9$ per year, for INTC's appreciation over 100. 4.9/74=6.6%. Another deal, even better. The interesting thing is how cheap the 1/99 calls are. Evidently, noone thinks INTC is going to be hitting 100 this year. Management said they'll recover in the second half, but I guess noone believes them.
4. Let's assume both AMAT and INTC triple, by the expiration of those 1/2001 LEAPs. Yes, I know, that's two massive assumptions. If AMAT goes from 33 to 99, the 40 calls should be worth about 59$. 59/10.125=5.8 ROI. You made 5.8 times your original investment. For INTC, 74 to 222 means the 100 calls are worth 122. 122/13=9.4. 9.4 is a lot better than 5.8. The fact that AMAT LEAPs are more expensive than INTC's (you have to pay a greater percentage of the underlying stock price for each years growth, 11.5% vs. 6.6%) indicates the market thinks the long-term outlook is better for AMAT than INTC. The INTC LEAPs are further out-of-the-money, but not that much...... Interesting...... I look at lots of numbers, and then I throw the dice. |
