Long-term options attracting investors

Although they were planted in a less-than-ideal climate, the seeds of a new investment product appear to be taking root on Wall Street. The securities in question, known as long-term stock options, made their debut Oct. 5 at the Chicago Board Options Exchange and the American Stock Exchange.

Since then the number of these options outstanding in the two markets has increased steadily, surpassing 6,000 by late last week.

Observers describe that as a respectable showing, especially given the depressed state of enthusiasm right now for just about anything associated with stocks.

"It's very hard to persuade people to enter the stock market these days, let alone the options market," said Harrison Roth, an options specialist at the firm of Cowen & Co. "It's still a little too early to tell, but I think this product will be successful."

At the Chicago options board, these vehicles are known by the trademarked anagram LEAPS, for long-term equity anticipation securities. The American exchange has been content so far with the generic name long-term stock options.

Whatever you call them, they are closely related to the short-term options on individual stocks that have been bought and sold on Wall Street for decades in two basic forms: Calls, which give their owners the right to buy a specified stock at a set price within a stated time period; and puts, which carry the right to sell the stock in question under similar terms.

Conventional puts and calls traded in organized markets generally have lives of nine months or less. The new long-term options, by contrast, can run for almost two years.

To would-be speculators in options, that can represent a big difference. They might, for instance, feel much more confident staking their money on the chances for a market recovery by mid-1992 than by next spring or summer.

But the extra time comes at a price. Thursday, for example, when the stock price of Merck & Co. stood at $81.87, a call option to buy 100 shares at $95 between now and January went for $50, excluding commissions.

LEAPS at that same price, not due to expire until July 1992, traded at $687.50 apiece, reflecting the significantly better chance that Merck stock will climb above $95 in the next 15 months than within 90 days or so.

That example illustrates how important it is in options trading to be able to evaluate relative levels of option "premiums" _ the time value built into their prices over and above their worth if they were exercised immediately.

In some ways at least, long-term options can be seen as a more conservative vehicle than their established short-term cousins.

Roth suggests that investors who can't commit the time and energy required for short-term options trading may have a better chance at operating successfully in the long-term arena.

"You still have to keep track of your investment," he advises, "but you may not need to monitor it every day, hour by hour."

Furthermore, if strategies employed with long-term options require less frequent buying and selling than is common with short-term contracts, the burden of commission costs can be lightened.

No matter what the scheduled life of a stock option, some things remain the same. A call on a stock that never reaches the exercise price can be relied on to approach a value of zero by the time it expires.