Henry D. I suspect there might be such an animal... You might check with your broker. Forgive me, please for what I'm about to say, but I would be very careful. Options - whether they are shorter term or longer term (LEAPS) are wasting derivitive assets. The price of any option comes from (1) the time value of the option (this is the primary wasting component), (2) the relationship of the option's strike price to the value of the underlying asset (intrinsic value), and (3) volatility which is in some measure derived also from the volatility of the underlying asset....
While I grant you that the leverage you can gain with an option on a LEAP might be enormous, so is the risk. As a very general rule of thumb, think of the time value of an at the money option as worth about 1% monthly on the strike price of the option. An at the money option with an expiration of January 01 has a premium derived only from the time value of roughly 20% or so. Then you have the volatility angle and so on. Dell (trading right now at 42 and change) 2001 42 1/2s are going for 16. If you were tempted to buy LEAPS, the only thing that Dell needs to do between now and then is rise 30% for you to break even, right? With Dell, that might be possible, even easy to accomplish.
Now, think of buying an option on an option. If I were holding such a wasting asset as a LEAP; and wanted to sell you an option on my holdings, wouldn't I want the same kind of premium as I am paying (Yes, I am paying that time value aren't I?)? (Not only that, but since the market isn't liquid, I think I'm agonna want a lot more than a normal premium, because the odds are very low that I as the seller of that asset would be able to find a seller if I ever wanted to buy it back.)
The long and short of it is that for the leverage you are going to get by buying an option on an option, you are going to pay a premium on top of a premium, making you get even number even that much higher.
Now, I don't what your strategy really is, but it would seem to me that if what you want is greater leverage on a long term option against a high potential stock, then consider going out of the money - even deep out of the money. The simpler you keep it, the less likely you are to be burned. Remember that the only people who are guaranteed to make money are the brokers who do it on the spread. |
