What Kind Of Stock Is Investment As Trading And Short-Term LEAPS – An Introduction to Long Term Options

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LEAPS – An Introduction to Long Term Options

LEAPS, or long-term Equity AnticiPation Securities, are essentially the same as regular options, except they expire much further into the future.

LEAPS features include:

  • It first became available in 1990
  • Longer shelf life (9 to 30 months)
  • The expiration date is always in January
  • LEAPS has a different trading symbol naming procedure than regular options
  • Becomes a regular option once it falls within nine months of expiration, although the only real change is that its trading symbol changes according to the procedure for naming an option’s regular trading symbol
  • Never have more than two active LEAPS expiration cycles at any one time (eg January 2009 and January 2010, but not January 2011 until after January 2009 becomes a regular option)
  • LEAPS is not available for all options trading stocks

Time fades and jumps

The amount of daily time decay, also known as theta, for LEAPS occurs at a much lower rate than for near term options. In fact, a fundamental characteristic of all options is that the closer the option gets to expiration, the faster the rate of its daily decay over time accelerates.

Advantages of LEAPS:

  • Ability to use position / investment without using margin
  • More time for major stocks to move in the direction you expect
  • Flexibility – LEAPS can be used on its own or as part of various other trading strategies

Disadvantages of LEAPS:

  • The Bid-Ask spread penalty is much steeper for LEAPS than for near term options
  • The stock MUST move (up for LEAP calls, down for LEAP puts) by a certain amount for you to break even if you hold it as a simple long position
  • No benefit from ownership (dividends, voting rights, etc.)

What you can do with LEAPS:

In addition to simply buying and holding LEAPS as part of a mid- to long-term replacement for owning the underlying stock (and potentially generating significantly higher returns), LEAPS can also be used as components of other strategies. They are most often used in a closed fashion, where LEAPS are held as a substitute for owning the underlying stock, and then near-term options (in this case, calls) are sold against them for profit or as a way to reduce the cost of the underlying on the jump.

Conclusion:

Alternative strategies are many and varied. Strategies can be used to achieve any number of goals. JUMPS are just another tool available to the flexible options trader. Like all options trading strategies, LEAPS can be used conservatively or aggressively at will. If you are not familiar with LEAPS, further research may be required to determine if there should be a place for them in your own portfolio.

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