The only way to talk about LEAPS options is to start with the obvious question: What does ‘LEAPS’ mean? This acronym stands for Long Term Anticipation Security. It’s clear right away that these options are for long-term investors with no plan of selling short.
Now what does that mean in real life? And what’s in it for an investor? The difference between traditional options investments and LEAPS options can be significant for the right kind of investor. As with any investment, though, you have to know the benefits and drawbacks of investing in them.
Interested in long-term holdings? LEAPS options might be right for you
Options, traditionally, are financial instruments whose value is dependent on an underlying asset or asset group. When an options transaction takes place, the parties involved develop an agreement known as an options contract. The options contract provides an opportunity to either sell the asset or buy it. The type of options contract dictates whether buying or selling is the specified outcome. The majority of options have expiry cycles of three months, six months, or nine months. This is one of the major differences: the terms of LEAPS options are usually a minimum of two years, although you will sometimes come across one-year terms, but never any shorter than that.
Investor temperament plays a role, too. Short-term traders are often more drawn to three-month or six-month options, while investors thinking about longer-term investments would likely favor the LEAPS options.
Aside from the length of time, you’ll notice a lot of similarities between LEAPS and traditional options.
LEAPS were initially introduced in 1990 and focused solely on stocks, but they’ve grown to incorporate other instruments for indices as well. LEAPS come in call options, and put options. Call options allow for the buying of an asset by the holder during a specific timeframe. Put options allow for the selling of an asset by the holder during a particular timeframe.
How investors should handle call and put options
If you’re confident in the LEAPS option that you are considering, and believe it will increase in price over the span of its contract, then you should opt to buy the call options.
On the other hand, if you believe the price will drop before the expiry date is reached, buy the put option.
We can also consider this information in another way. Often short-term traders who are willing to take on more risk will have a greater interest in short-term options of a few months or less. More conservative investors will opt for a term of at least one year because it provides them risk reduction, especially when investing in index-related LEAPS like ETFs.
Investors interested in buying LEAPS options will look for ones they believe will increase considerably in value before the expiration date. For those investors who consider buying LEAPS for profit, it is best to seek out ones that have high deltas. These investments provide the best chance of increasing value.
Have you invested in both LEAPS and traditional options? What are your thoughts between the two?