LEAPS stocks. The acronym stands for Long-Term Equity Anticipation Securities. These involve contracts that are at least one year long from the date of purchase.
Some investing professionals look at LEAPS stocks like they are substitutes for stocks. This is the case because there is less risk with these investments as they are not owned in a portfolio.
Understanding the history of LEAPS stocks
LEAPS stocks were introduced in 1990 by the Chicago Board Options Exchange (CBOE) so they are newer than many other investment options. With LEAPS, the holder has the ability to buy a call or sell a put up to the specified expiration date for a predetermined price. With LEAPS you are not buying and owning the stock because they are not assets.
As with other shorter-term options, it is possible to lose one’s entire investment in LEAPS. So it is important to invest carefully and to do so in these long-term options when you feel confident in it.
Knowing the length of LEAPS stocks
These long-dated put and call options require a minimum contract of at least one year, but they can be as long as three years. This long nature of LEAPS makes them different from other security options, which typically have much shorter expiration periods. Contracts associated with LEAPS always expire in January of the expiration year.
Having a longer period of time before the expiration date allows an investor to gain more exposure to price movements. If the price rises significantly, it can lead to a big profit for the holder. However, as with all options, the value of the security tends to decline rapidly as the expiration date approaches. If the security increases in value after the expiration date, then the investor will still lose out on gains.
Benefits in LEAPS can help some investors
LEAPS are desired options for aggressive investors or those who are investing with money they are not concerned with losing. LEAPS can be helpful for investors who want diversification and exposure to a specific sector without the need of investing significant capital.
Investors looking for LEAPS to invest in will typically seek out a LEAPS call that is deep-in-the-money, meaning that the LEAPS strike price is lower than its current stock price. The deeper-in-the-money the LEAP is, the higher the price tag on the option will be. Although the price may be higher, the option will also have more intrinsic value and behave more like a stock substitute.
In recognizing the benefits of LEAPS it is also important to know the drawbacks, too. For instance, since an investor does not own a stock while investing in a LEAP, then the LEAP cannot lead to dividend payments or voting rights — two areas where investors can benefit.
Overall, investing in LEAPS exposes investors to a lot of risk, which can have a significant impact on the value of a portfolio. If you choose to invest in LEAPS stocks, do so with great caution and with money you can afford to lose.
Have you ever invested in LEAPS stocks? How did it differ from investments in shorter-term options?