Super long expiration leaps

[Abundance Magnet]

If you do exchange Flex you can visit the OCC site, it links from the FLEX page and see what has traded. Most of it is under 5 years and a small percentage is longer - you can go out as long as 15years with Flex. Heavily dominated by index names and deal stocks. Assume your entry will be OK and you will be raped if you go to exit very early.
You don't have to enter an order to get a sense of the market - they do a RFQ, but don't expect to get filled if you do a ton of RFQs with trading.

interesting... with spreads as wide as they are LEAPS (especially less liquid names), sounds like the spread game is even worse on these products. i.e. underlying has move a lot before the position is profitable

 

[ajacobson]

One could argue spreads need to wide in long dated stuff because as you go longer in time volatility becomes less important. Not unimportant. Longer dated stuff the swap rate becomes much more uncertain. What will rates be in 5 years - 10 years - or 15 years?

 

[sle]

So are we done at that price?

spot or DP?

 

[sle]

The day-to-day properties of 2 year options are very similar to those of 5 year options. You're on a wild goose chase.

That's not really true, right? You going to have a massive increase in rate and dividend sensitivity as your expiration moves out. For single names it gets even trickier, since you have to make all sorts of assumptions about borrow and dividends.

 

[sle]

Take a look at the time variable is BS. Hint, it's part of an exponent. In fact a 2025 put won't sell for much more than a 2020 put. In fact what actually happens is that the price of the put asymptomatically approaches the price of the stock, which is itself a real option. If the extrensic of the 2020 already approaches the stock price, there's not much further for it to go, no matter how many years you add.

Mkay, I think you are thinking about it in a wrong way. In a vanilla black scholes, your strike is discounted, but both terms inside the normal distribution are also dependent on the interest rate (so your mean grows as you are discounting). My suggestion is not to bother with the discounting (at least for now) - it get's really complex once you go there, there is a reason why everything long-dated trades with deferred premium.

You can just use Black 76 which is discounted externally and it assumes that the forward price is the random variable (which is better for long-dated options for a variety of reasons, not the least being funding/collateral complexities). For example, 5 year was quoted around 15% this morning, that's in terms of deferred (undiscounted) premium, while 2 year was just over 8%.

 

[ajacobson]

You can see every exchange Flex trade at the OCC site.

 

[truetype]

That's not really true, right? You going to have a massive increase in rate and dividend sensitivity.

Absolutely, but for OP's purposes ρ is still a second-order effect, unless I'm missing something, and long'ish dated options are dominated by vega. If OP actually wants an interest rate play there are much tighter, higher bang-for-buck ways to make that bet than trying to squeeze a little ρ out of an options position.