In
finance
Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
, Long-term Equity AnticiPation Securities (LEAPS) are
derivative
In mathematics, the derivative is a fundamental tool that quantifies the sensitivity to change of a function's output with respect to its input. The derivative of a function of a single variable at a chosen input value, when it exists, is t ...
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, 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
stock
Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
s; 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
An exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges. ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or comm ...
(ETF) and "...buying put protection on that ETF with LEAPS." 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 ...
*
Contract for difference
In finance, a contract for difference (CFD) is a financial agreement between two parties, commonly referred to as the "buyer" and the "seller." The contract stipulates that the buyer will pay the seller the difference between the current value o ...
*
Equity swap
External links
Long-term Equity AnticiPation Securities (LEAPS) at CBOE
References
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Options (finance)