LEAPS, or long-term equity anticipation securities, are publicly traded option contracts with expiration dates that are longer than one year.
LEAPS offer long-term investors the opportunity to gain exposure to prolonged price changes in the underlying security without needing to use a combination of short-term option contracts. This article will give investors a basic understanding of what LEAPS are so that investors are able to use this tool in their investing playbook.
LEAPS are structurally the same as regular short-term options, with the only difference being the longer amount of time until expiration. Because LEAPS have a longer time until expiration, they have higher premiums than short-term options. This is because the longer an option has until expiration, the higher the likelihood that the underlying stock will make a substantial move “in-the-money.”
LEAPS allow an investor to focus on the long-term price fluctuations of an underlying asset without investing in the larger amount of capital that would be required to own the underlying asset outright. LEAPS can be purchased for individual stocks and stock indexes like the S&P 500.
Stock LEAPS give investors exposure to stocks without having to own or short sale the stock. Stock LEAPS call options allows investors to benefit from a potential rise in the stock’s price while using less capital. Stock LEAPS put options allows investors to benefit from a potential decrease in the stock’s price. Puts can either be used to generate a profit or used as a hedge against unfavorable downside moves in the stock’s price.
Index LEAPS allows investors to hedge and participate in indices that track the entire stock market or specific segments of the market. Index LEAPS call options allows investors to take a bullish stance on the market. Whereas index LEAPS put options allows investors to take a bearish stance on the market.
LEAPS are a useful tool for investors when they want to participate in the long-term move of an underlying security without putting forth the necessary capital to own that security. LEAPS allow investors to bet on the rise or fall of the entire market, thus generating a potential profit or hedge against a loss.
