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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Tom Bunge who wrote (26107)	7/15/1999 2:08:00 PM
From: Gerald Walls	Respond to of 74651

One major factor there, it seems to me, is tied to just how much "in the money" you are. An msft 50 long leap call is almost ownership which you finance - with a lot of money - at the level of almost 50% ... makes sense that your time and volatility premiums be the lowest. The premium increases progressively as you move out of the money. And this makes sense if you think about it as buying the stock on margin. The less money you put up, that is the less in-the-money the option is, the more interest you have to pay. If you hold until expiration all of the time premium has eroded and you have, in effect, paid interest on a margin purchase. Of course with options this decay is non-linear and there are sweet spots where you can roll out to longer calls before the decay really picks up (the whole principle behind a calendar spread, btw).