A:

A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the option to buy or sell shares of stock at a set price, called the strike price. Expiration dates on LEAPs can range from nine months to three years, making them a more long-term holding than a traditional call option.
Because of their long-term nature, existing LEAPs are often sold by the very investors who originally purchased the contracts. When LEAPs are sold at a profit, the gain is taxable. The seller of the LEAP will be taxed at long-term capital gains rates if they held the contract for at least a year and a day. If they held the contract for less time, they would be subject to short-term capital gains rates.

Selling a LEAP option contract is not the only way that an investor can face tax consequences within this transaction. An investor who exercises his LEAP call option and then sells the shares of stock immediately would be subject to short-term capital gains rates even if he had held the LEAP contract for more than 12 months. Once a LEAP call option is exercised, the investor must then hold the shares of stock for more than 12 months from the date the contract is exercised in order to pay long-term capital gains tax rates. For a put, the investor who sells the stock at the LEAP's strike price and subsequently makes a profit would pay capital gains tax based on the amount of time he owned the actual shares, without regard to the length of time he held the contract.

RELATED FAQS
  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  3. How can I profit with call options?

    Learn what a call option and a long call strategy are, how to speculate stock price increases using a call option and how ... Read Answer >>
  4. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  6. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
Related Articles
  1. Investing

    Long-Term Equity Anticipation Securities: When To Take The "LEAP"?

    Options are always speculative, but LEAPS provide a longer time frame, which may make them more profitable.
  2. Trading

    Rolling LEAP Options

    The rewards of using LEAP call options can be a lower cost of capital, higher leverage and no risk of margin calls.
  3. Trading

    Using Options Instead Of Equity

    Learn how to multiply returns and diversify risk by buying options instead of stock.
  4. Investing

    Using LEAPS In A Covered Call Write

    Discover how strategy can help reduce your downside risk.
  5. Investing

    Covered Call Strategies For A Falling Market

    Find out how to come out on top, even when the market is dropping.
  6. Trading

    Stock Option Expiration Cycles

    Understanding expiration cycles is just one more way to help you increase your success rate when trading options.
  7. Investing

    Creating Highly Effective Hedges With Index LEAPS

    Index LEAPS can be a highly effective way to hedge a retirement portfolio consisting of index or mutual funds, without the effort of short-term options trading.
  8. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  9. Investing

    Using LEAPS With Collars

    This options strategy will help you lock in profit while keeping your upside potential.
RELATED TERMS
  1. Long-Term Equity Anticipation Securities - LEAPS

    Publicly traded options contracts with expiration dates that ...
  2. Index Roll

    A passive index investing strategy that is established by using ...
  3. Options Contract

    A contract that allows the holder to buy or sell an underlying ...
  4. FMAN

    One of the three regular option cycles; represents the months ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  6. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center