interesting... with spreads as wide as they are LEAPS (especially less liquid names), sounds like the spread game is even worse on these products. i.e. underlying has move a lot before the position is profitable
One could argue spreads need to wide in long dated stuff because as you go longer in time volatility becomes less important. Not unimportant. Longer dated stuff the swap rate becomes much more uncertain. What will rates be in 5 years - 10 years - or 15 years?
That's not really true, right? You going to have a massive increase in rate and dividend sensitivity as your expiration moves out. For single names it gets even trickier, since you have to make all sorts of assumptions about borrow and dividends.
Mkay, I think you are thinking about it in a wrong way. In a vanilla black scholes, your strike is discounted, but both terms inside the normal distribution are also dependent on the interest rate (so your mean grows as you are discounting). My suggestion is not to bother with the discounting (at least for now) - it get's really complex once you go there, there is a reason why everything long-dated trades with deferred premium. You can just use Black 76 which is discounted externally and it assumes that the forward price is the random variable (which is better for long-dated options for a variety of reasons, not the least being funding/collateral complexities). For example, 5 year was quoted around 15% this morning, that's in terms of deferred (undiscounted) premium, while 2 year was just over 8%.
Absolutely, but for OP's purposes ρ is still a second-order effect, unless I'm missing something, and long'ish dated options are dominated by vega. If OP actually wants an interest rate play there are much tighter, higher bang-for-buck ways to make that bet than trying to squeeze a little ρ out of an options position.