---> Anybody using LEAPS®?

Discussion in 'Options' started by short&naked, May 4, 2009.

  1. If so, what are the pitfalls? They seem to greatly improve on the issue that most options traders fall into: time decay.
     
  2. The issue that most options traders fall into is lack of knowledge.

    What is your mathematical background? Would you be so kind as to prove your time decay conjecture about LEAPS mathematically?
     
  3. Why do you need mathematical proof that LEAPS don't burn theta as quickly as short term options?

    Aside from the fact that you didn't answer my question...
     
  4. MTE

    MTE

    Longer term options have lower deltas than shorter term ones and are extremely sensitive to changes in volatility and interest rates.
     
  5. Please reread what you initially wrote. I did not ask you for "mathematical proof that LEAPS don't burn theta as quickly as short term options" as that was not your conjecture. Your conjecture restated is "They [LEAPS] seem to greatly improve on the issue of time decay".

    I am asking for mathematical proof of the claimed improvement. Unless LEAPS follow different mathematical rules for time decay than short term options or are underpriced/overpriced relative to their time decay there is no improvement and your stated conjecture is false.

    Thus the obvious pitfall is thinking that LEAPS are better than short term options for the average trader.
     
  6. Pardon, my friend, but the fact that you demand that I answer your question without even attempting to answer mine is off.

    Your objective is obviously to be right, not to help (typical for the loser ET crowd... what else is new).

    Oh, and LEAPS are underpriced. Peroid. But I'm sure a math genious such as yourself knew that.
     

  7. Just a quick question... What do you base your speculation that LEAPS are under priced on?

    I am not interested in the "time decay" debate since the "issue" was not determined. For who use options as a leverage tool to guess on market direction it may be an issue but its not a good idea to assume thats what all people use them for.
     
  8. They tend to be since it is harder for the market to price what will happen further on down the line.
     
  9. Why dont you think they tend to over price them?

    I think the issue is they're priced correctly based on the given data whether you believe they should be higher is more of an opinion not based on the empirical data.


    I think you'll find that options tend to be priced fairly and when they're not the markets are efficient enough these days that the anomaly will be corrected rather rapidly
     
  10. You have answered your own question.

    You believe that LEAPS are cheap. Then buy them. You don't need another opinion.

    But, if you really want to know the pitfalls, MTE has given you a good reply.

    Your comment suggests you are an options rookie - and I'd like to be certain that you truly understand that LEAPS are far more dependent on implied volatility than shorter-term options. If IV continues to decline, buying LEAPS will not be a profitable trade for you. On the other hand, if you want to bet on IV increasing, then LEAPS are for you

    If your goal in buying options is to earn a profit from predicting market direction for your specific underlying, then LEAPS are a poor choice. You want options that have more gamma, not more vega.

    Mark
     
    #10     May 5, 2009