Introduction To LEAPS

[Leth]

Basic Primer to LEAPS
By Investors.com

LEAPS are Long-term Equity Anticipation Securities. A LEAP is nothing more than a listed option that is issued with two or more years remaining until expiration.

Many of the strategies involving LEAPS are similar to those used for shorter-term options but special considerations apply. Generally, the longer term the option, the less rapid the decay of option premium. This is a good thing for an investor with an intermediate to longer-term focus. Many shorter-term options favor the seller as their premiums erode making it necessary for the buyer to not only be right, but to be right, now. That coupled with a generally larger spread (percentage between bid and offer) and typically higher commission leave the buyer of short-term options sometimes playing against the odds. The fact that the option premium in LEAPS will tend to erode more slowly, therefore, will tend to favor the buyer and be less advantageous to the seller, for instance, a covered writer.

LEAPS will also be much more responsive to changes in dividends and interest rates than shorter-term options. A well-laid plan can be spoiled by the effect of a meaningful change in interest rates which is certainly conceivable over a two or three year period. Therefore, it is important to recognize that many of the variables used to price options can either be magnified in the case of LEAPS or can change considerably over the course of two or three years, and dramatically change the way the market prices of LEAPS.

LEAPS will become regular option contracts when they become 9-month options.