Ed,
An interesting strategy with leaps is as follows:
Buy a ZDEAI (Dell Jan 2001 45 call) for $12.5.
Wait a day (sometimes not even that much) and write a ZDEAJ (50s) for $12.5.
What is interesting is that currently the price of the options is about $1.125 apart (spread between them), and the beta is 0.5. So, when the underlying moves about $2.25, the options move $1.125. You could just sell the ZDEAI at that point and make $112.50.
However, if you sold the ZDEAJ instead, you're locking in a profit of $5, assuming that the stock closes above $50 in Jan 2001. Actually, if the stock moves substantially above $50 before then, the options will become deep in the money, and the spread between them will expand to close to $5, in which case you can close both positions for a nicer $450+ profit. Also, if you hold these for a long time, you have to only deal with long-term capital gains, but that's a different story.
- Marq. |
