LEAP Options: How They Work

Leaps Options: LEAPS refers to Long Term Equity Anticipation Security.  These are options that consist of longer terms than average, as in the date of expiration.  LEAPS are not as common as other options but are still available on roughly 2,500 equities and 20 indexes.  However, like short-term options, LEAPS are also available for calls or puts. 

Options for LEAPS are traditionally created with expiration cycles of three months, six months or nine months, with no option term exceeding a year’s worth of time.  While there might be some exceptions now, traditional LEAPS are still the majority.  LEAPS are relatively new to the market and may extend as long as 2-3 years out.  As is the general rule, the farther away the expiration date, the more expensive the option is.  LEAPS are also available for indices now, as opposed to merely equities.

Leap Options Trading Strategy

LEAPS are popular tools of investors who hope to reduce their risks.  The LEAPS strategy makes it possible for investors to manage risk and protect pricing by buying out put protection.  Obviously, using LEAPS does not guarantee success, as nothing in the market is ever 100% sure.  However, having more time on your contract for the position to work is a positive.

Advantages of LEAP Options

There are also other advantages to using LEAPS.  LEAPS lets you take an alternative route to stock ownership.  It allows you to benefit from price rises, while also risking less capital, as opposed to ordinary share-purchasing.  If the stock price increases to a level that is higher than the exercise price stated by the LEAPS contract, then the buyer has the right to purchase shares below the market price.  Then the investor can turn around and sell back the LEAPS calls for a much higher profit.

Options Trading System: LEAPS

The buyer is also able to use these calls to diversify his or her portfolio.  Historically speaking, the market tends to reward investors in the long-term.  Most investors do not purchase shares in every single company they follow.  They carefully select according to market performance and research.  What’s nice about a LEAPS call is that once bought you have the right to purchase shares of stock at a specified period of time—or even up to three years into the future. 

LEAPS contracts also allow investors the opportunity to hedge their current stock holdings.  So if you are thinking about potential price drops on stock that you own, know that LEAPS options let you sell the underlying product at the strike price.  You can also do this at any time, up to the expiration date.

 Are there any negatives to using LEAPS options?  Risks are limited, but still existent.  You have to invest the price you paid for the position.  If you are an uncovered seller of LEAPS calls or puts there is actually unlimited risk.  The risk generally varies according to what strategy you take.

Understanding the risk of LEAP Options

It is important for investors to fully understand fully the risk of LEAPS as well as how this financial tool can work in your favor.  If you are willing to stick around for the long-haul, you may find LEAPS very beneficial.

One way to use LEAPS is in a covered call in exchange for stock options. You can buy a LEAPS online for expiration in Jan a year or two away and sell current month options against it. The current month option will provide monthly income while the stock may appreciate in value. Thus, the value of the LEAPS will go up, while you make money month after month.

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