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Author: TMFHamp Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1209  
Subject: Re: LEAPS as Stock Substitute Date: 3/19/2007 4:27 PM
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<<It would seem that after a big dip would be a good time to buy LEAPs, but oftentimes a big dip will cause IV to spike up, driving up the price of the option, yes? Or is it better to find a relatively stable stock that has flatlined for a while or traded within a tight range, resulting in a lower IV?>>

Hi Paul,

You are a wise man and correct on all counts. During a big market decline, implied volatility (IV) skyrockets and buying options is a mistake. I would sell puts or buy/sell vertical spreads in that case.

Buying LEAP calls works best for stocks with strong fundamentals that have flatlined for a while (i.e., IV is subdued) and ready to move up over the intermediate term.

Current examples: Whole Foods (WFMI) and BJ Services (BJS)


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