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Yes, but the question is would you not have been more profitable using short dated
options to employ your strategy. Why would I ever get short something that would
obligate me to buy/sell for a long period of time? You would .. so in effect you
trade the leap on a short term basis.
The issue of liquidity in leaps is a common concern. They should be about the same
liquidity as the short dated option, but they should have a more generous b/a
spread. The reason being that the Leap has an extra unknown of cost of carry(which
is more uncertain for longer dated options)which is not as much of a concern for
shorter dated option.
If interest rates were 0% and a 1 month ATM option were aa $1. A 25 month leap
would be the square root of 25 or $5. Now interest rates aren't zero % so the Leap
would actually be $5 plus the carry which would be significant for the leap.. why
sell 25 months for $5+carry when I could sell 1 month for $1 plus carry. Now on a
case by case basis there might be a specific trading circumstance where you could
make the case for the Leap(Generally a better strike price than is available in
short options)but it is rare. Saying you made good money .. which is wonderful
.... doesn't mean that a superior risk/reward didn't exist with a short dated
product.
Alexander Levitin wrote:
> With all due respect to your knowledge of options (and who could not
> respect it) may I discuss one of your note?
>
> I have found shorting LEAPS very profitable enterprise (make it just plain
> profitable). LEAPS do fluctuate with the changes in underline securities.
> And if underline moves in a trading range you could repeatedly sell LEAPS
> at the top of the trading range and then repurchase it at the bottom.
>
> The biggest problems I am seeing are (a) the luck of liquidity in the LEAPS
> and (b) the luck of price levels for the options (the options do not
> venture far enough from the price of underlining to construct some strategies.
>
> Respectful Alex.
>
> At 10:07 AM 8/27/99 -0500, THE DOCTOR wrote:
> >Potentially you could both be correct or you could both be wrong. Options
> >change
> >in value for four reason. Time, price of the underlying, interest rates and
> >volatility. It is true that most of the time erosion occurs late in the
> >life of
> >an ATM option, but it is not as true for ITM or OTM options. What you really
> >want to do is go get a option pricing model and run a few simulations of ALL
> >the
> >inputs. The option GREEKS are essentially what you are looking to understand.
> >
> >THETA (time erosion)is greatest for short term options as you mention, but
> >so is
> >GAMMA(the rate of acceleration of the rate of change)so if you are wrong about
> >direction and your short option goes into the money near expiration it would
> >"hurt" you the most. So it is very difficult to generalize, because rarely is
> >only one variable changing.
> >
> >Look at October 1987 as an extreme example. The market went down huge and
> >volatility went up huge. You would have observed in October 1987 that
> >people who
> >wrote short calls(either covered or naked)were surprised to find that in many
> >cases their short calls didn't decline in value by very much because of the
> >increase in volatility.
> >
> >You also mention Leaps .... there is almost no reason to ever short a LEAP ..
> >either covered or naked. Leaps have very little time erosion(THETA)and
> >accordingly have very little(GAMMA) which makes an instrument that would most
> >often be senseless to short. The only justification I've ever come across to
> >short long options related to tax/timing issues or the need to sell a strike
> >price that does exist in short term options.
> >
> >Lot's of web sites offer free option pricing models .. you might want to visit
> >optionscentral.com for links to various sites.
> >
> >GREHERT@xxxxxxx wrote:
> >
> >> I have a question about options. I'm debating a point with a friend.
> >>
> >> If you sell a call to make a profit on the premium shrinkage, I understand
> >> most of the shrinkage occurs in the last 30 days of the call. My friend
> says
> >> this is true but if the stock moves away from the strike price, the premium
> >> goes away very early.
> >>
> >> Question: (1) is this true? (2) is it the same for LEAPs?
> >>
> >> Thanks for your consideration.
> >>
> >> Jerry Rehert
> >
> >
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