Long Term Equity AnticiPation Securities (LEAPS)

| April 4, 2012 | 0 Comments

long term optionsLEAPS is the name given to long term options.  A LEAPS is nothing more than a listed call or put option that is issued with two or more years of time remaining until expiration.  Other than that, they’re not much different from regular options.

Let’s take a closer look at the basics of LEAPS:

  1. Type:  LEAPS can be either calls or puts.  And just like with regular equity options, the owner can buy the underlying stock at the strike price (call option) or sell it at the same price (put option).
  2. Underlying Security:  The underlying security for LEAPS is 100 shares of common stock or American Depository Receipts (ADRs) of companies listed on securities exchanges or that trade over-the-counter.
  3. Expiration Date:  LEAPS expire on the Saturday following the third Friday of the expiration month, just like other equity options.  LEAPS only expire in January.
  4. Striking Price:  LEAPS use a standardized striking price interval.  When the strike is between $5 and $25, the interval is 2.5 points.  The interval is 5 points for strike prices between $25 and $200.  And for strikes over $200, the interval is 10 points.
  5. Exercise:  LEAPS use American style expiration.  In other words, you can exercise a LEAPS option on any business day prior to the expiration date.
  6. Pricing:  Terms like in-the-money, out-of-the-money, intrinsic value, time value premium, and parity all apply to LEAPS and have the same definitions as with regular equity options.  What’s more, the same factors influence the pricing of LEAPS, including:  underlying stock price, striking price, time remaining, volatility, risk-free interest rate, and dividend rate.

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Category: Options Trading Basics

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.