RE: Dell Jan 2001 options
Several Dell investors on this thread apparently think that they are increasing their leverage by buying out-of-the-money Dell leaps, e.g., the Jan 2001 120's (ZDEAD).
If the choice is between buying and holding ZDEAD or Dell through Jan 2001, I agree.
However, in the near term, it appears to me that if Dell were to increase $10 which is 10/97 = 10.3%, then ZDEAD would increase only about 8.5%.
This is based on the somewhat simplistic approach that the closing "ask" price for ZDEAD was 32.5, while the closing "ask" price for the Dell Jan 2001 110's (ZDEAB) was 35.25. If Dell were to appreciate $10, then ZDEAD will appreciate approximately 35.25 - 32.5 = 2.75, which is only about 8.5% of 32.5.
I realize that this math is different from the math using the "delta" of the option, but in my experience it is more accurate.
The practical significance of this is that it suggests that a Dell investor interested in leverage will be better off using a modest amount of margin, and continuing to increase it proportionately as Dell appreciates, as opposed to leveraging through options.
JB |
