Recently in the Option Trader I bought some Jan '09 LEAPS calls and received a number of questions from subscribers about why I purchased calls with an expiration so far out. First, let me note that LEAPS is a registered trademark and stands for long term equity anticipation securities. LEAPS generally are calls that expire more than a year out.
Some of the inquires from the subscribers indicated that they thought I intended to hold this position until expiration. Nothing could be farther from the case. In fact, in that particular instance, I sold the position for a nice gain two days after I entered the position. In another recent case, where I just closed a LEAPS position, I held for eleven months. That, indeed, is a rarity for me.
I do like to buy a lot of time when I enter directional positions. The reasons include the fact that there is plenty of time for the stock to "do its thing" and hopefully move in the direction I suspected it would. In addition to that, the Delta is often higher at the same strike price for the longer term option than it is for the same strike price at a shorter expiration.
Overall, there are some advantages in purchasing long term call options because the buyer has control of the stock until expiration at a much lesser price than he would had he bought the stock. Of course, the buyer of a call does not receive dividends nor does he have the opportunity to vote in corporate elections. The call option also expires which means that time value decreases as the position gets closer and closer to expiration. That phenomenon is one of the downsides of owning options. One of the significant upsides, naturally, is that one obtains a great deal of leverage when buying the option as opposed to buying the stock.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
-- by the Dividend Investor Team
