Options are contracts that give the holder leverage on underlying stocks. Options contracts can be bought and sold to control large shares of stock with less exposure to financial risk. LEAPS, an acronym for Long-Term Equity Anticipation Securities, are special types of options, which have expiration dates much longer than standard short-term options.
Long-Term Options
Options contracts typically have expiration dates of a few months. LEAPS have expiration dates between nine months and 2.5 years. Holding a standard option contract only gives a short period of time for the position to work. With the long-term expiration dates of LEAPS, there is much more time to allow for a successful trade.
Similarities
LEAPS are the same as short-term options in that they are traded and quoted on an options exchange, just as are stocks on stock exchanges. Both types of options have the same assignment and trading procedures, and one contract covers 100 shares of stock. Commission and margin fees are also the same.
Differences
The principal difference between short-term options and LEAPS is the length of time until expiration. Also, not all stocks for which options are available have LEAPS options. LEAPS are typically only offered on stocks in very active sectors and on large-cap stocks. Because of the extended period of time, the pricing of LEAPS is different from that of short-term options.
An Alternative to Buying Stock
Buying a call option allows the option holder to benefit from a rise in a stock's price without risking as much money as actually buying the stock itself. If the stock price rises above the options' exercise price before the expiration date, the option's holder can exercise the option, purchase the stock at a lower price, and turn around and sell it at the current price for profit. Or the option itself can be sold for a profit. Since the stock market historically yields positive returns to investors over time, this strategy of using options as an alternative to owning stock is especially well-suited for LEAPS, which have expiration dates of up to several years.
