LEAP Options or regular Options

LEAP OptionsMost options are traded within 90 Days to Expiration. LEAP Options are just like regular monthly options except that they have a long time to expire. LEAP options are options with DTE of  more than 1 year from today. LEAP stands for Long-term Equity Anticipation Security. Investors will pay a lot of money for options with much days to expiration.


With Options you can control 100 shares of stock. Options are much cheaper than buying 100 stocks. For instance Apple will cost you of $10.035. If you think a stock will be higher you can buy a LEAP call option instead of 100 shares of stock; it will cost less. Likewise, if you think a stock will be lower in a year, you can buy a LEAP put option instead of shorting the stock or buying a series of shorter term puts.

Time Decay of LEAP Options

Unlike weeklies, the time decay in LEAPs is very slow. Assuming you exit the LEAP while it still has 6 months or more to go until expiration, you are unlikely to lose much value in the form of time decay. (If the underlying stock moves wildly while you hold the LEAP then you will make or lose much more from that action than from the passage of time.)


Example of a LEAP Options

Let’s say today is Thursday, May 30, and let’s say you like Apple it is a $100 stock. To buy 100 shares it will cost you over $10,000.  Some people would buy a LEAP option instead. Current long term expiration dates are:

  • Jan 20, 2018 (602 days), this is a LEAP (more than a year)

An trader could buy a Jan 2018 LEAP call option. They can buy an at the money strike price of 125 for $17.50. That means for $1,750 you control 100 shares of AAPL between today and Jan 20, 2017. That’s a lot less expensive than buying 100 shares at today’s price of 124.49, which would cost $12,449. Regular (short term) options are much more traded than LEAP options. Sometimes only a few hundred contracts of LEAPS are traded. So it is not easy to close and profit from your LEAP option when it moves in your favour. The market is at a all times high. Will it go higher or down?

If a trader buys the LEAP call option you still have all the upside but, on the downside the most you can lose is $1,750. If AAPL drops to $75 by Jan 2018 investors who owns the stock would lose almost $50K. And the LEAP call buyer would lose $1,750.  That is a lot of money. Especially when you have a small account of $25K. Some people will reduce capital to buy a spread instead of a naked call option. But Bid-ask spreads on LEAPs are usually quite wide.  It is expensive to roll or difficult to exit the position if you want to.


Sell regular Options

Options become interesting when the stock underlying stocks moves much. The more volatile the stock is the more expensive the option will be. Because of their long  expiration date LEAPs expensive to buy, and they are hard to close. Volatility could fall after you purchase the LEAP, which would reduce it’s value. Even if no time has passed and the underlying stock price hasn’t moved. There is no guarantee that the volatility will return. Because of this the Option looses worth. And if the price of the underlying drops too, it becomes hard to make money. The stock needs to move largely in order to make any profit.

Most options are traded within 90 days to expiration. When you sell out of the money options you have have a lot of benefits. Your probability of profit is much higher, when volatility drops You will benefit greatly and you benefit from options decay when time passes. For these reasons we sell options in order to receive option premium.