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Introduced by the Chicago Board Options Exchange (CBOE) in 1990, LEAPS (Long-term Equity Anticipation Securities) are a special type of stock or index option.
Unlike traditional stock and index options, LEAPS can expire anywhere from 9 months to almost three years in advance.
LEAPs account for almost 10 percent of all options listed and are available on over 1,000 financial products and are available at all six U.S. options exchanges.
The basic premise of LEAPs is that they trade like regular options, but provide investors with the benefit of being exposed to equity price appreciation for a lot less money at risk.
This means that investors can remove the need to try and precisely time the market and they can instead focus on merely trying to predict how the market will trend over the longer term.
Since LEAPs perform like other options contracts, an investor can be exposed to the medium-term and long-term price movements in a stock, for significantly less capital than if they were required to buy the stocks outright.
Investors can also benefit from price falls since LEAPs are available as both calls and puts – making LEAPs a highly effective option type for hedging a portfolio.
LEAPs are easy to buy and sell for regular options traders as many of the features of a LEAPs contracts are the same as regular options.
For example, the number of shares covered in a LEAPs contract is 100 and the exercise and assignment procedures are identical to regular options.
The key differences lie in the availability, time erosion, pricing and strategies involved.
Buying LEAPs
Due to the fact that LEAPs expire so far into the future, pricing them becomes much more difficult compared to regular options contracts.
It is for this reason that exchanges wait until there is sufficient regular options trading demand for a particular stock before they consider listing a LEAP option.
Once sufficient demand is reached for the regular stock options, the exchanges will work with specialists and market makers to confirm that they are willing and able to both price and trade these longer-dates options.
The LEAP’s expiration month is usually January, but depending on the stock and the time of year there may also be March, June and September LEAPs available.
As time passes and a LEAP approaches less than one year to its’ expiration, it will trade as an ordinary shorter-term option and lose its’ distinctive LEAPs symbol.
It is also at this time that new LEAPs with expiration dates that are far in the future are also added.
Conclusion
LEAPs are longer-dated options that expire between 9 months to three years.
LEAPs are used by investors to gain exposure to longer-term price movements, without having to spend as much capital as would be required if buying all the stocks outright.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
