To: AMF who wrote (49444 ) 11/12/1999 11:35:00 AM From: Wyätt Gwyön Read Replies (1) | Respond to
AMF, re: LEAPS; it all comes down to your risk/reward tolerance. The deeper you go in the money, the more the option will move for each dollar of share-price movement. That ratio is called the delta. If your strike is deep enough, it will move at or almost 1 for 1 with common. If it is shallow in the money, at the money, or out of the money, your contract will move less per dollar of share movement. Furthermore, you pay more in the way of time premium. OTOH, the total paid for shallow money or out of the money is less than for deep. So you could spread a given amount of dollars over a greater number of contracts. Thus, one DIM contract might have delta .9, but perhaps you could afford two shallower money contract with delta .6. Obviously, two .6's is greater than one .9. Just depends on your risk tolerance. Seems many people are buying contracts with Q at its all time high without understanding these basic concepts. That is OK, as long as price keeps going up. But what if price treads water, or goes down? If you are DIM, then you may still have something left at the end of the day. If you are shallow ITM or OTM, then time is really your enemy and you could lose all you have invested. Note that even deep in the money (DIM) calls give you considerable leverage compared to common (and are of course riskier), so my general opinion is it's good not to get too greedy. That is why I like DIM's. One simple exercise is to add the premium you pay for the call to the strike price. See how far above the current stock price that is. If you hold till expiry, that is the price you will need to beat in order to make money. Of course, most options purchasers do not intend to hold till expiry, but rather seek to resell what they buy to MM's or others, so many people may not really care if their option would ultimately be exercisable for a profit, as long as they can sell it for a profit at some point. Best to be careful! All JMHO We all now the bedtime story about bulls, bears, and pigs. Cheers, MM
