Series 7

AAA

Derivatives - Long Term Equity Anticipation Securities (LEAPS)

Before ending this discussion of equity options in particular, we must introduce long-term equity anticipation securities, or LEAPS - a trademarked term for long-term stock or index options.

  • LEAPS, like all options, are available in two types - calls and puts - but with one important distinction. Other exchange-traded options expire in a matter of months; LEAPS can take one to three years.
  • LEAPs allow long-term investors to gain exposure to a prolonged trend in a given security without having to roll several short-term contracts together.
  • Another benefit is the ability to invest a smaller amount of capital in order to participate in the long-term price movement, rather than the larger amount of capital that would be required to own the underlying asset outright.
  • The added benefits come at a cost. Premiums for LEAPS are higher than for standard options on the same underlying asset because the increased time to the expiration date gives the underlying asset more time to make a substantial move.

As mentioned earlier, shares of stock are just one of any number of assets from which options can be derived. Historically, equity options have made up the largest segment of the market, as well as the most newsworthy because of their impact on executive compensation. But stock options represent at best a plurality, not a majority, of the number of option contracts traded in the U.S. in a given year.

Index Options
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