Ask the Institute

DATE: March 12, 2002

QUESTION:
If you buy a LEAPS® option, can the value increase and actually become profitable before the price of the underlying stock reaches the strike price?

ANSWER:
Yes, options can rise in price and become profitable before the price of the underlying stock reaches the strike price. How option prices change is too complicated to describe in just a few words, but option prices respond to changes in the underlying stock price. In general, as the stock price rises, call prices will also rise. At the same time, however, time has a negative impact on option prices. As time passes toward expiration, option prices decline. How fast the underlying stock prices rises determines when a purchased call becomes profitable.