What Are LEAPS?

You may or may not be familiar with “LEAPS.” LEAPS are basically just long term options. The name is in fact an acronym standing for “Long Term Equity Anticipation Security.” The main distinction between common options and “LEAPS” is the option’s longevity. Generally speaking, LEAPS offer a very long period of time between initiation and expiry.

Equity LEAPS are available on over two thousand stocks, and index LEAPS are available on twenty indexes. Additionally, they can be purchased either as calls or puts like with common options. Calls and puts operate in the same way with LEAPS as they do with standard options.

Most LEAPS options fall into three categories. When first introduced, these three categories were the only ones available. Nowadays, the market has expanded, but largely, the initial three LEAPS categories still prevail. The standard LEAPS cycle stretches 3, 6, and 9 months of time. While all of these options fall short of the 1-year mark, they are considerably longer term than common options or, at the other extreme, weekly options.

Like many similar financial instruments, LEAPS provide traders of all varieties an avenue to protection. A LEAPS option makes for a great way to reduce risk. They can also be used to make money from long-term fluctuations in the stock market. That being said, LEAPS options also pose a risk to the inexperienced.

Indeed, the longer term your choice of LEAPS, the pricier it will be. An expensive LEAPS option charges a large premium and thus can lead to a loss of your investment if mismanaged. That’s why it is imperative you educate yourself on option trading and apply a sense of strategic awareness to your trading of index and equity LEAPS. What is the best way to learn about this fairly recent, fairly specific brand of option trading?

The optimal way of doing this is to pursue a general stock option training course. These will teach you how to select the best type of LEAPS option and how to manage it appropriately. It will also teach you the best way to close out a trade.  It sometimes pays to trade the option, while in other situations it is more ideal to exercise the instrument or let it expire. This decision making process is often times simple — choose whatever is most profitable.

Related Pages

Option Strategies


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