Long-Term Equity Anticipation Securities
The term long-term equity anticipation securities (LEAPS) refers to publicly traded options contracts with expiration dates that are longer than one year, and typically up to three years from issue. They are functionally identical to most other listed options, except with longer times until expiration.
A LEAPS contract grants a buyer the right, but not the obligation, to purchase or sell (depending on if the option is a call or a put, respectively) the underlying asset at the predetermined price on or before its expiration date.
Definition: Long-term Equity Anticipation Securities (LEAPS) are publicly traded options contracts with an expiration date of more than one year, typically three years from issuance. They function similarly to most other listed options but have a longer expiration period. LEAPS contracts grant the buyer the right (but not the obligation) to buy or sell (depending on whether the option is a call or put) the underlying asset at a predetermined price before the expiration date.
Origin: LEAPS were first introduced by the Chicago Board Options Exchange (CBOE) in 1990 to provide investors with longer-term options trading choices. Over time, LEAPS were adopted by other exchanges and became a common investment tool.
Categories and Characteristics: LEAPS are mainly divided into call options and put options. Call LEAPS allow the holder to buy the underlying asset at a predetermined price before the expiration date, while Put LEAPS allow the holder to sell the underlying asset at a predetermined price before the expiration date. The main characteristics of LEAPS include:
- Long-term nature: Expiration periods typically range from 1 to 3 years, providing a longer investment timeframe.
- Flexibility: Investors can choose to exercise the option at any time before the expiration date.
- Risk management: LEAPS can be used as hedging tools to help investors manage long-term risks.
Specific Cases:
- Case 1: Suppose Investor A is optimistic about the long-term prospects of a tech company but does not want to buy the stock immediately. A can purchase a call LEAPS option on the company, locking in the current price and exercising the option to buy the stock at any time within the next three years.
- Case 2: Investor B holds a large amount of stock in an energy company but is concerned about future uncertainties in the energy market. B can purchase a put LEAPS option on the company, allowing them to sell the stock at a predetermined price, thus hedging against potential price declines over the next three years.
Common Questions:
- How do LEAPS differ from regular options? The main difference is that LEAPS have a longer expiration period, typically 1 to 3 years, whereas regular options usually expire within a few months.
- Who are LEAPS suitable for? LEAPS are suitable for investors with long-term investment goals or those looking to hedge long-term risks using options.
- What are the risks of LEAPS? Like all options, LEAPS carry risks, including market risk and time value decay. Investors should fully understand these risks and invest according to their risk tolerance.
