What is Long-Term Equity Anticipation Securities ?

1966 reads · Last updated: December 5, 2024

The term long-term equity anticipation securities (LEAPS) refers to publicly traded options contracts with expiration dates that are longer than one year, and typically up to three years from issue. They are functionally identical to most other listed options, except with longer times until expiration.A LEAPS contract grants a buyer the right, but not the obligation, to purchase or sell (depending on if the option is a call or a put, respectively) the underlying asset at the predetermined price on or before its expiration date.

Definition

Long-term Equity Anticipation Securities (LEAPS) are publicly traded options contracts with an expiration date of more than one year, typically three years from issuance. They function similarly to most other listed options, except they have a longer expiration period. LEAPS contracts grant the buyer the right (but not the obligation) to buy or sell the underlying asset at a predetermined price before the expiration date, depending on whether the option is a call or a put.

Origin

LEAPS were first introduced by the Chicago Board Options Exchange (CBOE) in 1990 to provide investors with longer-term options contracts, allowing for better long-term investment strategies. Over time, LEAPS have become an important tool for investors to make long-term market forecasts and manage risk.

Categories and Features

LEAPS can be categorized into call options and put options. Call options allow the holder to purchase the underlying asset at a fixed price before the expiration date, while put options allow the holder to sell the underlying asset at a fixed price before the expiration date. The main feature of LEAPS is their longer expiration period, which allows investors to make market predictions and investment strategies over a longer timeframe. Additionally, LEAPS typically have lower price volatility because their longer expiration period can mitigate the impact of short-term market fluctuations.

Case Studies

Case Study 1: During the 2008 financial crisis, many investors used LEAPS put options to hedge the risk of their stock portfolios. By purchasing LEAPS put options, investors were able to gain protection during market downturns, thereby reducing losses. Case Study 2: In 2019, an investor predicted significant growth in the technology sector and purchased LEAPS call options on a tech company's stock. Over time, the company's stock price rose significantly, and the investor realized substantial gains by exercising their LEAPS call options.

Common Issues

Investors may encounter issues when using LEAPS, including: 1. Time decay: As the expiration date approaches, the time value of LEAPS gradually decreases. 2. Incorrect market predictions: If the market moves contrary to the investor's predictions, LEAPS may result in losses. 3. Liquidity risk: Due to the longer expiration period of LEAPS, their market liquidity may be lower, making them harder to buy or sell.

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