Options Trading: Understanding Leap Options

A LEAP option is a long term option. The acronym LEAP stands for Long-Term Equity Anticipation Security. The basic difference between a standard option and a LEAP option is the time left until expiration. The expiration date on the LEAP is much further out. LEAP options can have expirations that go out more than two years. All LEAPS will have a January expiration date and the new year will get added when a previously listed year expires. However, the LEAP option does not officially expire in January. LEAP options will be converted to standard options about 6 – 7 months before expiration. They will cease to be a LEAP at that time. This used to result in a class symbol change at the same time but it no longer does since the Options Symbology Initiative. Now LEAPS and standard options carry the same class symbol, the underlying stock symbol. It is then (in the middle of the year) that they new LEAP options will be listed.

Not every company will have a LEAP option. It is primarily relegated to the larger well capitalized companies. It a stock does not have short term options listed then it will not have LEAPs listed either. There are a few things to consider is you are going to trade LEAP options.

The first is that there is a huge time element built into the price of the LEAP option as you can imagine. But since the LEAP option has so far to go before expiration it is less prone to time decay for awhile. An option that is only two months till expiration is decaying at a much faster rate than a LEAP option will. Since this is true a LEAP can provide you with better risk to reward ratios when using them for strategies that require you to hold longer term options.

I find that LEAPS are great ways to play companies that may have been beaten down unfairly during a market wide collapse. Rather than committing the money to outright hold the stock you can use LEAPs to hopefully ride them back in the market recovery.