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Technology Stocks : Intel Corporation (INTC)
INTC 47.61-5.2%1:22 PM EST
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To: Jean M. Davies Schmith who wrote (9268)1/25/1997 10:48:00 AM
From: Sadim Gnik   of 186894
 
Jean,

A LEAP is the same as an option in all respects except that it has a much longer time until expiration (1-3 years). They are generally available in a variety of strike prices. For example, INTC LEAPS are currently available in strike prices from 40 to 205 and expiration in Jan 1998 or 99.

Because the duration is so much longer, the price you have to pay is much higher than for a one-month option. If you buy an INTC Jan99 160 call (symbol VNLAX), you will currently have to pay $3300.

The present value of a LEAP like any option can be thought of as consisting of three components:

1) Intrinsic value
2) The cost of borrowing the strike price until expiration at risk-free interest rates.
3) The value of being able to choose in Jan 99 whether to exercise or not.

In the case of VNLAX, its intrinsic value is zero (since it is out-of-the-money). The cost of borrowing $16000 until Jan 99 is about $1800. The remaining value of $1500 is essentially your bet that INTC will be significantly more than $160 in two years. Your break-even point will be $199 at expiration.

INTC LEAPS with strikes at $160 or less are a fairly low risk investment (IMO) and promise much higher reward than just going long INTC. Personally, I am long INTC and just buy a few LEAPS as a little extra 'hot-sauce' on top).

Sadim (Hold The Pickles) Gnik

PS: Of course, sometimes there is a fourth component of a LEAPS's value: the little bit extra your (evil nasty descendant of misogynistic dead white European males) broker will skim off if he suspects you are a womyn. (:-))>
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