what are long term equity anticipation securities leaps 
leaps or long term equity anticipation securities are publicly traded options contracts with expiration dates that are longer than one year typically leaps may expire up to three years from the date of issue they are functionally identical to most other listed options except with longer times until expiration a leaps contract grants a buyer the right but not the obligation to purchase or sell depending on if the option is a call or a put respectively the underlying asset at the predetermined price on or before its expiration date understanding long term equity anticipation securities leaps leaps are no different from short term options except for the later expiration dates lengthier times until maturity allow long term investors to gain exposure to prolonged price movements as with many short term options contracts investors pay a premium or upfront fee for the ability to buy or sell above or below the option s strike price the strike is the decided upon price for the underlying asset at which it converts at expiry for example a 25 strike price for a ge call option would mean an investor could buy 100 shares of ge at 25 at expiry the investor will exercise the 25 option if the market price is higher than the strike price should it be less the investor will allow the option to expire and will lose the price paid for the premium also remember each put or call options contract equates to 100 shares of the underlying asset investors must understand that they will be tying funds up in these long term contracts changes in the market interest rate and market or asset volatility may make these options more or less valuable depending on the holding and the direction of movement index leapsa market index is a theoretical portfolio made up of several underlying assets that represent a market segment industry or other groups of securities there are leaps available for equity indexes similar to the single stock leaps index leaps allow investors to hedge and invest in indices such as the standard poor s 500 index s p 500 index leaps give the holder the ability to track the entire stock market or specific industry sectors and take a bullish stance using call options or a bearish stance using put options investors could also hedge their portfolios against adverse market moves with index leaps puts leaps premiumspremiums are the non refundable cost associated with an options contract the premiums for leaps are higher than those for standard options in the same stock because the further out expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit known as the time value option marketplaces use this lengthy timeframe and the intrinsic value of the contract to determine the value of the option intrinsic value is the calculated or estimated value of how likely the option is to make a profit based on the difference between the asset s market and strike price this value may include profit that already exists in the contract before purchase the contract writer will use fundamental analysis of the underlying asset or business to help place the intrinsic value as mentioned earlier the option contract has a basis of 100 shares of the asset so if the premium for meta meta formerly facebook is 6 25 the option buyer will pay 625 total premium 6 25 x 100 625 other factors that can affect the premium price include the volatility of the stock the market interest rate and if the asset returns dividends finally throughout the life of the contract the option will have a theoretical value derived from the use of various pricing models this fluctuating price indicates what the holder may receive if they sell their contract to another investor before expiration leaps were first introduced by the cboe in 1990 and are now ubiquitous long term equity anticipation securities vs shorter term contractsleaps also allow investors to gain access to the long term options market without needing to use a combination of shorter term option contracts short term options have a maximum expiration date of one year without leaps investors who wanted a two year option would have to buy a one year option let it expire and simultaneously purchase a new one year options contract this process which is called rolling contracts over would expose the investor to market changes in the prices of the underlying asset as well as additional option premiums leaps provides the longer term trader with exposure to a prolonged trend in a particular security with one trade types of leapsequity leaps call options allow investors to benefit from potential rises in a specific stock while using less capital than purchasing shares with cash upfront in other words the cost of the premium for an option is lower than the cash needed to buy 100 shares outright similar to short term call options leaps calls allow investors to exercise their options by purchasing the shares of the underlying stock at the strike price another advantage of leaps calls is that they let the holder sell the contract at any time before the expiration the difference in premiums between the purchase and sale prices can lead to a profit or loss investors must also include any fees or commissions charged by their broker to buy or sell the contract leaps puts provide investors with a long term hedge if they own the underlying stock put options gain in value as an underlying stock s price declines potentially offsetting the losses incurred for owning shares of the stock in essence the put can help cushion the blow of falling asset prices for example an investor who owns shares of company xyz and wishes to hold them for the long term might be fearful that the stock price could fall to allay these concerns the investor could purchase leaps puts on xyz to hedge against unfavorable moves in the long stock position leaps puts help investors benefit from price declines without the need to short sell shares of the underlying stock short selling involves borrowing shares from a broker and selling them with the expectation that the stock will continue to depreciate by expiry at expiry the shares are purchased hopefully at a lower price and the position is netted out for a gain or loss however short selling can be extremely risky if the stock price rises instead of falling leading to significant losses advantages and disadvantages of leapsthere are several key benefits and drawbacks of investing in long term equity anticipation securities we ve listed some of the main ones below long time frame allows selling of the optionused to hedge a long term holding or portfolioavailable for equity indicesprices less sensitive to the movement of the underlyingcostlier premiumslong time frame ties up the investment dollarsmarkets or company movements may be adverseprices more sensitive to changes in volatility and interest ratesexample of leapslet s say an investor holds a portfolio of securities which primarily includes the s p 500 constituents the investor believes there may be a market correction within the next two years and as a result purchases index leaps puts on the s p 500 index to hedge against adverse moves the investor buys a december 2021 leaps put option with a strike price of 3 000 for the s p 500 and pays 300 upfront for the right to sell the index shares at 3 000 on the option s expiration date if the index falls below 3 000 by expiry the stock holdings in the portfolio will likely fall but the leaps put will increase in value helping to offset the loss in the portfolio however if the s p 500 rises the leaps put option will expire worthless and the investor would be out the 300 premium 