When I first bought LEAPS (Long-Term Equity Anticipation Securities), I knew it could give very good returns if things go my way, but I did not know how many folds it can generate as compared to the percentage of share price gain. So I came out with this formula to get the answer.
Using 3 simple matrices of delta, current share price and premium paid, I am able to find out the expected growth of my premium if there is any share price gain. I will illustrate this formula with an example.
Type Of Options: Apple LEAPS CALL
Current share price: $150
LEAPS Expected Growth = (0.5 x $150) / 15 = 5
This means that whenever apple increases by 10% in share price, my LEAPS premium will increase by 50% in the premium price.
Proof Of Concept
Say Apple increases by 10% in share price, which is $15, so using a delta of 0.5, the premium should increase by $7.50.
If you take $7.50 / $15.00, it is a 50% increase in the premium price.
You can use a simple formula to help you display the results in an excel spreadsheet or you can calculate it offhand. Please also note that if the share price drops, the premium will drop even faster, using the same LEAPS Growth Formula. That is the risk of LEAPS, which I have explained in this article.
It is important to note that this formula is valid based on the assumption that Implied Volatility (IV) and delta stays constant throughout the price movement. In reality, IV drops and delta rises when the share price increases. A lower IV means the premium will become lower while a higher delta means the premium will rise more with every dollar of share price gain. Thus, the 2 matrices of IV and delta balance out each other and the formula is a pretty good gauge of what you will get when the share price increases.
What Is A Good Value?
I consider the premium price to be good if it produces a value of 5 and above using the Growth Formula. It means it can produce 5x my returns of any corresponding share price percentage gain. However, not many fundamentally strong companies can yield 5 and above. Some LEAPS that I own and can give such good numbers are Apple, Microsoft, Alphabet and Facebook.
I hope this sharing has been useful to you if you are deciding to pick up some LEAPS soon or in the future. If we pick a company with great fundamentals, high Growth formula, tends to be bullish in the long run, then there is a high chance you will make money out of the trade.