Looking at Goldman Sachs Black Swan event yesterday persuaded me to compare owning the stock to owning a leap (is Oct considered a leap?).
Let's compare the numbers from 4/14/10:
100 shares of GS @185.41 = $18,541
1 OCT 150 Call @39.70 = $3970
Close yesterday 4/16/10
100 shares of GS @160.70= $16,070
1 OCT 150 Call @23.10= $2310
Net Losses from drop in GS
Stock Loss $2,471
Option Loss $1,660
Now obviously these are apples and oranges and each has their advantages, but I think we should weigh those advantages.
When I buy calls I usually shoot for an 85 which means I do not benefit from a rise in the stock equal to actually owning shares. But the delta increases due to gamma as the stock price increases.
The call has time decay which I usually overcome by selling a current month call against. So where a covered call gives me full profit the short option sold against the leap help pays to maintain the leap (but it still delivers profit as well).
The leap has the advantage of decreasing gamma as stock price falls. So while I begin with an 85 delta gaining 85 cents on every dollar of potential gain if the stock had risen. Gamma causes the delta to fall to 65 so losses become a bit less painful as GS plummets.
Options do not allow you to participate in dividends, but those numbers are calculated into the Black-Scholes models of pricing.
So my question is ...Why own stock? Why put up nearly four times as much money to have more risk and just slightly more reward?
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