Thursday, February 20th, 2020

What Are LEAPS Options?

 

An options trader may wish to trade with a longer timeline than with regular options contracts. In this case he or she may choose LEAPS options. What are LEAPS options? LEAPS is an acronym. A Long Term Equity AnticiPation Security is an option with longer term until expiration than other options. There are LEAPS available for well over two thousand equities as well as nearly two dozen indexes. What are LEAPS options for traders? LEAPS are way to buy or sell puts or calls on contracts that commonly run for up to three years. This is as opposed to the three, six, and nine month terms for commonly traded options. What are LEAPS options for investors? They are a means of hedging risk through online options trading. As an example, an investor may purchase shares of a rapidly rising stock and also buys puts on the stock. This way he guards against an unexpected correction of the stock. If the stock falls in price he executes the put option and sells his stock at the contract or strike price, even though the market price may have fallen significantly.

Buying LEAPS Options

The Chicago Board Options Exchange, part of the CME group, offers a wide range of LEAPS options contracts. What are LEAPS options via CBOE for investors? Buying LEAPS calls with three year expirations is similar to buying stocks. The long term of a LEAPS contract, allows for the trader to profit from steady growth and prosperity of a company, and not have to try anticipating a short term move in the stock price. As mentioned above investors also use puts to preserve stock gains using LEAPS contracts. This provides insurance against a fall in price of the stock. It should be noted that traders pay for the increased time value of a LEAPS options contract. They cost more than regular options contracts.

Selling LEAPS Options

What are LEAPS options for options writers? As with all options trading, sells typically outperform options buyers over the long term. Options writers of LEAPS demand a higher price for selling puts and calls on LEAPS because of the time until expiration. Three years is a long time in the world of options and this can spell good profits for options writers and it can spell the occasional disaster. As will all options, the bulk of options writing is done by large trading houses and other with deep pockets because of the risk of an occasional substantial loss.

Trading Stock Indexes with LEAPS

Many traders and investors choose to trade LEAPS options on index traded funds. This approach has to do with investing in or betting against the overall economy and market. As will nearly all options trading one does not need to hold the LEAPS contract to expiration. Traders will exit their position by executing the opposite trade in order to secure profits or reduces losses. So, what are LEAPS options? They are a longer than usual options contract that provides a longer time span for making profits in both stocks and stock indexes. The options trading strategies that one uses will depend on the stock or index in question and a combination of fundamental and technical factors.

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