1. Options Interest Group
LEAPS
A presentation to the
Denver Trading Group -
Options Interest Group
October 9, 2003

2. LEAP Basics Long-term Equity Anticipating Securities Types Underlying
Expiration date
Strike price
Other basic factors
Margin
Renaming

3. Intrinsic Value & Time Value
Stock Price = $ 56.00
50-strike Call Option = $
Expiration = 90 days
Time Value = 3.00
Stock Price = 56
Option Premium = 9.00
Intrinsic Value = 6.00
Strike Price = 50

4. Option Pricing Stock Price = $ 56.00
50-strike Call Option (IV = 35) = $
Expiration = 90 days
TV=9
TV=7
TV=5
TV=3
Stock Price = 56
IV=6
IV=6
IV=6
IV=6
Strike Price = 50
Imp V = 35
Imp V = 50
Imp V = 65
Imp V = 80

5. Option Pricing Stock Price = $ 56.00
50-strike Call Option (Exp = 90) = $
Implied Volatility = 35
TV=5
TV=3
TV=2
Stock Price = 56
TV=1
IV=6
IV=6
IV=6
IV=6
Strike Price = 50
Exp=30days
Exp=60days
Exp=90days
Exp=180days

6. Call pricing curve

7. Call pricing curve (cont.)
Time value premium is greatest ATM
Intrinsic value is zero until strike price is passed.

8. Call pricing curve (cont.)
As IV shrinks, the price curve merges with the intrinsic line.
As expiration draws closer, the price curve merges with the intrinsic line.

9. Call pricing curve Time value is highest ATM
Far ITM and OTM time value = 0
OTM options will expire worthless if the stock moves too little
Delta moves from 0 OTM to +1 ITM

10. Time Decay
Exp=120days
Exp=90days
Exp=60days
Exp=30days

11. LEAPS pricing curve

12. LEAPS pricing curve

13. LEAPS pricing curve (cont.)
LEAPS ITM
delta is lower
Difference in LEAPS prices increases
as the LEAPS becomes ITM
LEAPS curve is quite flat
LEAPS OTM
delta is higher
LEAPS have little
time decay

14. LEAPS & interest rates
r = 9%
r = 6%
r = 3%

15. LEAPS & dividends $1 dividend increase With current dividend

16. Comparing LEAPS and short-term calls
Change in price of the options
20% OTM
ATM
20% ITM
Variable
3-mo
2-yr
Stock (+1 pt)
.03
.41
.54
.70
.97
.89
Volatility (+1%)
.43
.21
.48
.04
.33
Int. Rate (+1/2%)
.01
.27
.08
.55
.14
.72
Dividend (+$.25/qtr)
-.62
-.08
-1.18
-.14
-1.50

17. Comparing LEAPS and short-term calls
Change in price of the options
20% OTM
ATM
20% ITM
Variable
3-mo
2-yr
Stock (+1 pt)
.03
.41
.54
.70
.97
.89
Volatility (+1%)
.43
.21
.48
.04
.33
Int. Rate (+1/2%)
.01
.27
.08
.55
.14
.72
Dividend (+$.25/qtr)
-.62
-.08
-1.18
-.14
-1.50
Delta!

18. Comparing LEAPS and short-term calls
Change in price of the options
20% OTM
ATM
20% ITM
Variable
3-mo
2-yr
Stock (+1 pt)
.03
.41
.54
.70
.97
.89
Volatility (+1%)
.43
.21
.48
.04
.33
Int. Rate (+1/2%)
.01
.27
.08
.55
.14
.72
Dividend (+$.25/qtr)
-.62
-.08
-1.18
-.14
-1.50
Delta!

19. Comparing LEAPS and short-term calls
Change in price of the options
20% OTM
ATM
20% ITM
Variable
3-mo
2-yr
Stock (+1 pt)
.03
.41
.54
.70
.97
.89
Volatility (+1%)
.43
.21
.48
.04
.33
Int. Rate (+1/2%)
.01
.27
.08
.55
.14
.72
Dividend (+$.25/qtr)
-.62
-.08
-1.18
-.14
-1.50
Delta!

20. Comparing LEAPS and short-term calls
Change in price of the options
20% OTM
ATM
20% ITM
Variable
3-mo
2-yr
Stock (+1 pt)
.03
.41
.54
.70
.97
.89
Volatility (+1%)
.43
.21
.48
.04
.33
Int. Rate (+1/2%)
.01
.27
.08
.55
.14
.72
Dividend (+$.25/qtr)
-.62
-.08
-1.18
-.14
-1.50
Delta!

21. LEAPS Strategies For stock currently held long
LEAPS instead of short stock
Protecting existing holdings with LEAPS puts
As a stock substitute
Speculative option buying
Selling LEAPS
LEAPS spreads

22. Long Call +5 45 50 55 60 -5

23. JPM Stock vs. Purchase Date = 12.31.02 Purchase Price = $24.00
Last Date =
Last Price = $35.55
ROI = 48%

24. JPM 20 Call Jan’04 LEAPS Purchase Date = 12.31.02
Purchase Price = $6.20
Last Date =
Last Price = $15.60
ROI = 152%

25. Vertical spreads Directionality is the primary concern
Initially bullish or bearish
Remain bullish or bearish regardless of changes in market conditions
Volatility is a secondary concern
At expiration
A minimum value of zero (both options OTM)
A maximum value of the spread (both ITM)

26. Bull Call Spread Sell a call at a higher exercise price
Whenever the trader buys the lower exercise price and sells the higher exercise price, the position is bullish!
Buy a call at a lower exercise price

27. LEAPS Vertical spreads
Plenty of time for stock to move
OTM LEAPS options are inexpensive
You can make money before the expiration BreakEven
Recent volatility (rare)
Stock has fallen significantly in the last year or two

28. Extremely aggressive (OTM)
Stock
Inexpensive
Remote chance

29. LEAPS BuCS EBAY

30. LEAPS BuCS CTRX

31. LEAPS BuCS CTRX (cont.)

32. Bull Put Spread Sell a put at a higher exercise price
Whenever the trader buys the lower exercise price and sells the higher exercise price, the position is bullish!
Buy a put at a lower exercise price

33. Extremely aggressive (OTM)
Stock
Inexpensive
Remote chance

34. LEAPS BuPS MSFT

35. LEAPS & Butterfly’s Delta neutral Cheap when using OTM Butterfly’s
You can trade the body’s
Your position gets higher gamma when you buy back the body’s

36. LEAPS OTM Fly INTC

37. LEAPS OTM Fly INTC (cont.)

38. LEAPS & Calendar Spreads
Delta neutral
Increased risk due to larger debit
May need to buy fewer calls than you are selling due to the higher delta of LEAPS

39. LEAPS Cal Sp PSFT

40. Acknowlegements LEAPS Comparison chart Risk Graphs
Options as a Strategic Investment, Larry McMillan
Risk Graphs
Optionetics Platinum,