![]() LEAPS behave exactly like short-term options, but with a much longer time horizon. LEAPS can be used in conjunction with other options strategies to define risk, hedge a position, or reduce the LEAPS contract’s cost basis. LEAPS are bought and sold like their short-term counterparts, and can have American or European-style expirations. ![]() LEAPS strategies are similar to short-term options strategies but often favor buying strategies over selling strategies because of the slower rate of time decay. In many ways, LEAPS are similar to holding a long-term position in a stock, but with defined risk and much lower capital allocation. Sellers are obligated to the terms of the contract if assigned the options position. Buyers have the right, but no obligation, to exercise an option before expiration. If you’re interested in learning more about LEAP call options and options in general, you can read more in this free report.LEAPS function the same as a single-leg call or put option but have much longer maturities. ![]() If you’ve reached that stage with your LEAPS investing, you’ll be taking full advantage of the aforementioned leveraged equity exposure because your investment for a fraction of the price of the shares will enjoy 100% of further gains. Ideally, the share price will continue to rise to the point that your LEAPS contract is priced almost entirely by the intrinsic value.Īt that point, the contract will begin to trade as a stock analog where you’ll see dollar-for-dollar gains in the underlying contract. Initially, as the price of the underlying security rises, you’ll find that LEAPS contracts don’t gain as much value as the new intrinsic value replaces the time-and-volatility premium. The longer-term nature of LEAP call options can help mute the short-term market noise that can cause price spikes in shorter-term options contracts. These premium valuations are highly dependent on the underlying stock, and a stock that has previously had wild price swings or a rapid increase in value will typically command higher premiums. Contracts that are “out of the money” or “near the money” (meaning the contract price is near or above the stock’s share price) are valued entirely on time-and-volatility premium. If your contract is “in the money” (meaning that the contract strike price is below the current share price) its intrinsic value is the difference between the strike price and share price.įor example, if you have a contract for XYZ Company with a strike price of 20 and the shares are trading at 22, you have $2 per share of intrinsic value ($200 per contract). LEAP Call Options Pro #3 – Better Volatility MitigationĪn option contract carries two kinds of value, intrinsic value and time-and-volatility premium. If you were to use LEAPS to invest in the stock, you’re gaining upside exposure to 100 shares with a maximum loss of only 25% of the share price. A near-the-money contract in Tesla (TSLA), for instance, expiring in one year, costs roughly 25% of the current share price. However, with LEAP call options, because your initial capital outlay is smaller, you’re naturally limiting the downside risk. That’s an incredibly unlikely scenario and it’s far more likely that the declining share price would prompt you to sell once your stop-loss is triggered. The worst-case scenario when buying any stock is that the shares trade to zero and you lose your entire investment. LEAP Call Options Pro #2 – Limited Downside Risk This leveraged exposure means that a stock that trades 10 or 20% higher in a bull market could translate to gains of 100% or more in the LEAPS. When the stock trades above your contract strike price, your LEAPS contract will gain intrinsic value (and lose time and volatility premium) and can lead to big gains. Buying a LEAPS contract allows you to invest in the equivalent of 100 shares of the underlying stock at a fraction of the price. Buying at- or near-the-money calls is far less expensive than buying the underlying security but offers you exposure to the upside of a stock you’re bullish on. This feature is the primary reason that many investors find LEAP call options attractive. LEAP Call Options Pro #1 – Leveraged Equity Exposure ![]() ![]() Find out how in this free report, How Options Work-and How to Hedge Portfolios with Options. With little knowledge on the best strategies, you can use options to work the odds in your favor and make trades that have up to an 80% probability of success. Once considered a niche segment of the investing world, options trading has now gone mainstream. Free Report: How to Hedge Portfolios with Options ![]()
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