LEAPS
A chapter from our Advanced Homestudy Program

When you trade options, you can easily feel that you’re hurtling along in the financial fast lane. This is especially true in volatile markets, where quick turnarounds can whip you out of shortterm trades in less than a day. But you can move over and still enjoy the ride in the driving lane by investing in longer-term options known as LEAPS, or Long-Term Equity AnticiPation Securities. LEAPS were introduced on the Chicago Board Options Exchange (CBOE) in October 1990, more than 17 years after listed options began trading.

LEAPS are long-dated options that expire up to three or more years after their initial listing. Like regular options, each LEAPS contract represents 100 shares of the underlying security, and provides the flexibility to either buy or sell both calls and puts. You can thus take advantage of LEAPS whether you are bullish or bearish on a stock or index. If you, like many investors, are reluctant to sell stocks short, LEAPS can help diversify your portfolio between bullish and bearish positions with strategically selected LEAPS puts in addition to LEAPS calls.

With an expiration that is set months, or often years, in the future, buying LEAPS is an effective way to benefit from a stock’s intermediate- or long-term price movement without incurring the risk of a short-term speculative options position or the initial monetary investment associated with an outright stock purchase. LEAPS are often used as a surrogate for a stock purchase because they closely follow the movement of the underlying stock. Because these options can be purchased at a fraction of the cost of the stock (albeit a higher cost than shorter-term options), they also limit the dollar risk should the stock move against your expectations. For example, LEAPS calls are ideal for bullish investors with a longer-term investment horizon who are willing to ride out a trading range or a period of uncertainty in the belief that the stock will eventually move higher.

Unlike stocks, LEAPS are assets with a finite life; like short-term options they will expire at a predefined date. But the rate of time decay for LEAPS is much slower than for the typical shorter-term option. This is beneficial if you want to hold a position for a number of months, or even a couple of years. Also, equity LEAPS expire in January only, which offers tax benefits if you intend to close these positions near expiration in a subsequent tax year.

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