Long-Term Equity Anticipation Securities (LEAPS)
What it is:
Long-Term Equity AnticiPation Securities (LEAPS) is a registered trademark of the Chicago Board Options Exchange (CBOE). LEAPS are virtually identical to traditional exchange-traded options, but they expire up to three years in the future, which is much longer than traditional options' nine-month maximum.
How it works/Example:
LEAPS trade on a select list of optionable stocks and indexes determined by the Chicago Board Options Exchange. LEAPS receive special three-character ticker symbols to distinguish them from regular options, and they must be purchased through a broker dealer or trading network.
All equity options expire on the Saturday following the third Friday of January each year; traditional options have multiple expiration months. Holders of equity LEAPS may exercise their options on any business day prior to the expiration date. The CBOE lists new LEAPS in May, June, and July each year.
As with traditional options, many things affect the price of LEAPS including changes in the price of the underlying security, the strike price, the time until expiration, the volatility of the underlying security, dividends, and interest rates.
Why it matters:
LEAPS allow investors to do three things: diversify their portfolios, hedge their investments for a longer period of time, and participate in the medium- or long-term change of a security's price without making an outright purchase.
With LEAPS, the longer time to expiration allows for a wider range of possible underlying security prices (and hence greater risk) than traditional options. Additionally, because options give their underlying securities less time to reach a price favorable to the investor, option values are generally more affected by changes in the underlying security than LEAPS are. Further, because of their longer time to expiration, LEAPS holders may feel less pressure to react to short-lived changes in the price of the underlying security than stock option holders.