Leaps Explained by BetterTrades

LEAPS

Explanation by BetterTrades

Long-Term Equity Anticipation Securities - LEAPS

LEAPS are publicly traded options contracts that have expiration dates longer than one year.

LEAPS have Longer Expiration Dates

Longer expiration dates allow long-term investors to gain exposure to prolonged price changes without having to use a combination of shorter-term option contracts.

LEAPS - Premiums

LEAPS premiums are higher than those for standard options in the same stock because the longer expiration date gives the underlying asset more time to make a price move.

Diversification

LEAPS offer investors an alternative to stock ownership.

Investors also use LEAPS to diversify their portfolios.

LEAPS Calls

LEAPS calls enable traders to benefit from stock price rises while placing less capital at risk than is required to purchase stock.

Should a stock price rise to a level above the exercise price of the LEAPS calls, the buyer may exercise the option and purchase shares at a price below the current market price. The same investor may sell the LEAPS calls in the open market for a profit.

LEAPS Puts

LEAPS puts provide traders with a means to hedge current stock holdings. Investors should consider purchasing LEAPS puts if they are concerned with potential price drops on stock that they own. A purchase of a LEAPS put gives the buyer the right to sell the underlying stock at the strike price up to the option's expiration.

Risks

If you are a buyer of LEAPS calls or LEAPS puts, the risk is limited to the price you paid for the position plus commissions.

If you are an uncovered seller of LEAPS calls, there is a potential for unlimited risk, or a seller of LEAPS puts, significant risk.

Risk varies depending upon the strategy followed, and it is important for an investor to understand fully the risk of each strategy.

Stock vs. LEAPS

Unlike common stock, an option has a limited life.

Common stock can be held indefinitely, while every option has an expiration date.

If an option is not closed out or exercised prior to its expiration date, it ceases to exist as a financial instrument.

BetterTrades

BetterTrades is the premier stock market education company in America. It has empowered thousands of students to take control of their financial future by teaching options trading strategies that can be implemented in any market condition.

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