I recently attended a seminar where the instructor said that some brokers
recognize LEAPS securities as stocks and will allow writing of covered calls
against LEAPS, even in retirement accounts. I have searched since this time
and have not found a broker that will allow this strategy in a retirement
account.
Do you have a suggestion?
What are LEAPs?
Long-Term Equity AnticiPation Securities (LEAPs) are long-term options on
stocks that have expiration dates of one to five years rather than the shorter
terms (1 to 9 months) of most stock options. They are virtually identical to
regular options. LEAPS, however, provide these opportunities for much longer
periods of time. Although they are not available on all stocks, LEAPS are
available on most widely-held issues. LEAPS will have two series at any time
with January expirations. For example, in August 2004, LEAPS for a particular
stock might be available with expirations of January 2006 and January 2007.
Since equity LEAPS expire only in January of these years, these LEAPS will
have different options "root symbols" to distinguish one year from another.
I recently attended a seminar where the instructor said that some brokers
recognize LEAPS securities as stocks and will allow writing of covered
calls against LEAPS, even in retirement accounts. I have searched since this
time and have not found a broker that will allow this strategy in a retirement
account. Do you have a suggestion?
Buying a long-term call and selling short-term calls against it, an example
of a calendar spread, is a popular strategy. However, while the calls being
written are hedged, they are not considered to be "covered." In the event of
assignment, because of the 1-day lag between exercise and assignment, using
the long-term call to close out the position would require being short the
stock for a day. And many brokerages do not allow short stock positions in
retirement accounts under any circumstances. We can only suggest that you
continue searching for a broker that allows this strategy.
I own a number
of LEAPS options on a specific stock. From what I read in the press, the
company is planning to spin off a significant portion of their corporation
which obviously will reduce the price of their stock. Can you tell me how
option contracts will be treated, if and when this spin off occurs? Will we be
given LEAPS for the new corporation or compensated in some other way for the
reduced value of the options for what will amount to a smaller corporation
with a lower stock price and consequently a lower value for its LEAPS?
If an upcoming spin off has just been announced, the terms of a
possible adjustment may not be immediately known. Although the exact
adjustment may not be known, it is safe to assume that existing option
contracts will be adjusted so that an option holders' potential equity would
not be diluted. There are 4 things you can do that are proactive in locating
information regarding adjusted contracts due to splits, mergers and spin offs.
First, if you want to receive a notice when information is made public about
an option adjustment, you may sign up with the OIC’s automated e-mail system
at http://www.888options.com (Place
cursor over Trading Desk, select E-Mail Alerts and fill out the form).
Second, if you are unsure whether an option has been adjusted, you can
visit the OIC stock split, spin offs and mergers area at
http://www.888options.com (Place
cursor over Trading Desk and select Contract Adjustments). This will bring you
to the Information Memos section that explains how a contract may be adjusted.
(This is also a great place to learn about previous adjustments due to splits,
spin offs and mergers.)
Third, always check with your brokerage firm before placing the option
trade.
Fourth, you can call the Options Investor Services at 1-888-OPTIONS for
further explanation of those Information Memos.
If the spin off information is not available at
OIC, it will be
posted as soon as the OCC receives all of the relevant facts from the parties
involved in the corporate action and after the vote of the Securities
Committee. Generally, a definitive adjustment determination is announced as
soon as practical after all pertinent facts become available.Distributions of property other than the underlying security may require
different adjustments. For example, outstanding options might be adjusted to
include the distributed property. For example: If XYZ "spins off" its subsidiary ABC by distributing to its
stockholders 1 shares of ABC stock for each 5 shares of XYZ stock, outstanding
XYZ options might be adjusted to require delivery of 100 shares of XYZ stock
plus 20 shares of ABC stock at the original strike price in question.
What happens with my options contracts when a company is delisted from an
options exchange?
If a stock fails to maintain the minimum standards for price, trading
volume and float prescribed by the options exchange, option trading can be
wound down even before the stock is delisted by its primary market. In that
case, no new series would be added at expiration. Trading in existing series
would continue until they go "off the board". If trading in the underlying
stock is suspended by its primary market for an extraordinary reason before
the expiration of outstanding options, the options exchange will specify a
procedure for the orderly liquidation of option open interest in a special
bulletin.
Could you please tell me what is the rule for cash dividends? If a company
pays a $15.88 cash dividend, will OCC adjust this company's strike?
It depends on a few factors, including whether the cash distribution is
"ordinary" or "extraordinary". In most circumstances it's not the dollar
amount of the distribution, but the percentage of the distribution (as
compared to the aggregate market value of the underlying security) that is the
determining factor as to whether or not to adjust the options contract. A good
"rule of thumb" is that if the extraordinary dividend exceeds 10% of aggregate
market value of the security, an adjustment is likely.
Determination whether to adjust for cash dividends or distributions are
made on a case-by-case basis. According to Article VI, Section 11, of
OCC's
Amended By-Laws, a panel of OCC's Securities Committee has the authority
to determine if OPTIONS WILL or WILL NOT BE ADJUSTED FOR A CASH DIVIDEND (the
panel consists of two representatives from the Exchanges on which the affected
option is traded and the Chairman of OCC or his delegee, who only votes in
case of a tie). In cases where a foreign currency exchange rate is involved,
the strikes might not be adjusted, but the cash distribution would be included
as part of the deliverable as in the
Gucci memo
-- note that the exact amount is not known until the exchange of Euros to
Dollars takes place.
An example of an adjustment due to an "extraordinary" dividend (Iomega
Corporation) can be found
here.
An example of NO adjustment due to an "extraordinary" dividend (TV AZTECA)
can be found
here.
If you have a specific security in mind, you might want to visit our
Information Memo section
here.
This book describes just about every
fundamental strategy you could try with options. It covers the total return
concept of covered call writing, the pros and cons of option buying, examines
various types of spreads (vertical, calendar, and diagonal) and the various
delta (price) neutral strategies. If you have to have only one book on options,
this will be it.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
