Yes, I see your point, Dan. If I owned 3000 shares I would have 20,000 tied up in the stock at a value of 6-3/4. If the stock goes to 15, the value of my stock would be $45,000, a profit of $25,000. For me to make $25,000 on the leaps, assuming a stock price of $15 at expiration, I would have to buy 91 leaps, not 30 leaps. And if the stock price closed under 12-1/4 I'd lose all my money in the leaps. The cost of 91 leaps at 2-1/4 would actually be $20,000, the full value of the stock!! So it would not be a good deal at all, would leave me no free cash.
On the other hand, $15 is the break even point because if the stock went to $20, (or to $60-$70, what we'd expect in that long period of time with this stock), rather than $15, I'd make a LOT more money in the leaps than in the stock.
Linda |
