In
finance, Long-term Equity AnticiPation Securities (LEAPS) are
derivative
In mathematics, the derivative of a function of a real variable measures the sensitivity to change of the function value (output value) with respect to a change in its argument (input value). Derivatives are a fundamental tool of calculus. ...
s that track the price of an underlying financial instrument (stocks or indices). They are
option contracts with a much longer time to expiry than standard options. According to the Options Industry Council, the educational arm of the
Options Clearing Corporation
Options Clearing Corporation (OCC) is a United States clearing house based in Chicago. It specializes in equity derivatives clearing, providing central counterparty (CCP) clearing and settlement services to 16 exchanges. Started by Wayne Luth ...
, LEAPS are available on stocks and indexes that have an average daily trading volume of at least 1000 contracts. As with standard options, LEAPS are available in two forms,
calls and
puts.
Options were originally created with expiry cycles of 3, 6, and 9 months, with no option term lasting more than a year. Options of this form, for such terms, still constitute the vast majority of options activity. LEAPS were created relatively recently and typically extend for terms of 2 years out. Equity LEAPS typically expire in January. For example, if today were December 2020, one could buy a Microsoft option that would expire in January of 2021, 2022, or 2023. The latter two are LEAPS. In practice, LEAPS behave and are traded just like standard options.
When LEAPS were first introduced in 1990, they were derivative instruments solely for
stocks; however, more recently, equivalent instruments for
indices have become available. These are also referred to as LEAPS.
Applications
LEAPS are often used as a risk reduction tool by investors. For example, in an article in ''
Stocks, Futures and Options Magazine'', Dan Haugh of
PTI Securities & Futures suggests that stock investors can manage risk and price protection by considering the purchase of an
exchange-traded fund (ETF) and "...buying put protection on that ETF with LEAPS."
"Diversification is not Enough", ''Stocks, Futures and Options Magazine'', June 2009
/ref> In this example, risk is reduced when an investor in stock or ETFs buys enough LEAPS put options to protect all of the shares they own. LEAPS act like an insurance policy; it is possible to reduce the risk of loss to nothing but the purchase price of the LEAPS itself.
An investor can also buy a LEAPS call, giving them a long time (potentially more than one or two years) to profit if the underlying stock or ETF rises in price.
LEAPS are identical to standard options in how the investor gains or loses when trading them.
See also
* Option (finance)
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified d ...
External links
Long-term Equity AnticiPation Securities (LEAPS) at CBOE
References
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Options (finance)