Long
Term Equity Anticipation Securities
In this section we explore some Long Term Equity Anticipation
Securities also known as LEAPS. LEAPS expire only in
January and the January expiration month must be at least 7 months
away. Many of the stocks we cover in this section may not have any
LEAPS listed so we will look at their listed options and choose an
expiration date as far out as we can go.
HD - Home Depot Many
can foresee housing stocks such as Beazer, Meritage, Centez taking
a hit soon as money goes back into the stock market. We see this
as better opportunity to LEAP into either Home Depot or Lowe's.
With both of these companies beating earnings this week and their
continued growth in other countries, Homes Depot and Lowe's should
only befit if the economy slows down as more home owners spend more
time making the improvements themselves instead of paying a contractor
or handyman. Recently both stocks reach a 12 month low and broke
out to the upside this past week. Of the two stocks Home Depot has
further upside potential than Lowe's. Home Depot can move to a price
range of $50 as for Lowe's it looks like $48. As of Friday's close
HD closed at $33.45 and Lowe's closed at $42.82. Lowe's options
are more expensive than Home Depot's options. Looking at the current
prices and the distance each stock would have to travel to each
our selected strike price you'll find that they both would have
to move about $17.00 yet Home Depots call options cost $3.40 while
Lowe's are $5.30. Remember, timing is everything when it comes to
the stock market so be cautious and keep in mind that the one-year
anniversary of September 11th is only 2 ½ weeks away.
HD $33.53 Jan 2005 50 Call
| Option |
Bid |
Ask |
O.I. |
| 05
Jan 50 Calls |
$2.20 |
$3.30 |
888 |
LOW $42.82 Jan 2005 60 Call
| Option |
Bid |
Ask |
O.I. |
| 05
Jan 50 Calls |
$5.00 |
$5.30 |
583 |
To aid us in choosing the strike price we have
used the option Greeks for HD. If you're new to these we will list
the relevance to the right hand side under the result section.
| T
-Value |
Actual
Price |
Result |
| $3.08 |
$3.30 |
Fairly
Valued |
| |
|
|
| Implied
Volatility |
Historical
Volatility |
Result |
| 33.52% |
33.96% |
Fairly
Valued |
It is a market makers goal to get us to pay extra
for our options. So it is quite common that we will find many of
the option premiums to be slightly overvalued. It is when they get
too expensive (a 25% premium is expected) though that we want to
leave the trade alone, unless we are selling the option and then
we want to see the overpriced option as we are the ones to profit
from it. With the option ask premium currently trading at $3.30
we can use the Jan 05 $50.00 call Delta on HD of 0.34 to see where
the option price might reach as the stock goes up in value.
| Stock
Price |
Expected
Option Price |
Rate
of Return |
| $34.53 |
$3.64 |
10.3% |
| $35.53 |
$3.98 |
20.6%
|
| $36.53 |
$4.32 |
30.9%
First Resistance |
| $37.53 |
$4.66 |
41.2%
|
| $38.53 |
$5.00 |
51.3% |
| $39.53 |
$5.34 |
61.6%
|
Until next week,
Mark Larson Contributing Editor
Author: "Trade
Stocks Online" "Technical Charting for Profits" |
