Long-Term Equity Anticipation Securities (LEAPS)

What are LEAPS?

LEAPS are exchange-listed options with expiration dates longer than one year (commonly up to 39 months). Like standard options, a LEAPS call gives the buyer the right—but not the obligation—to buy the underlying asset at a specified strike price; a LEAPS put gives the right to sell. Each standard option contract typically represents 100 shares of the underlying.

How LEAPS work

• Buyers pay a nonrefundable premium for the contract.
• An option’s value is made up of intrinsic value (difference between market price and strike) and time value (the premium for remaining time until expiration).
• Longer maturities mean more time for the underlying to move, which usually raises premiums.
• Changes in volatility, interest rates, and dividends affect LEAPS pricing.
• Holders can exercise at expiration or sell the contract before expiry to realize gains or cut losses.

Index LEAPS

Index LEAPS are options on market indices (e.g., the S&P 500). They let investors:
* Hedge broad portfolio risk (e.g., buy puts to protect against a market decline).
* Take sector- or market-level bullish/bearish positions without trading individual stocks.
Index LEAPS settle differently from single-stock options (cash settlement for many index options), so check contract specs before trading.

Premiums and pricing factors

LEAPS premiums tend to be higher than short-term options because of greater time value. Key factors that influence premiums:
* Time to expiration
Implied volatility of the underlying
Interest rates
Expected dividends
Intrinsic value (if the option is already in-the-money)

Example: a quoted premium of $6.25 per share for a LEAPS option equals $625 per contract ($6.25 × 100 shares).

LEAPS vs. shorter-term options

• LEAPS provide long-term exposure with a single trade; without them you’d need to roll shorter-dated contracts, incurring additional premiums and execution risk.
• Short-term options are cheaper but require more frequent management.
• LEAPS reduce the need to time frequent option purchases but cost more up front and tie up capital for longer.

Types of LEAPS and common uses

Calls
* Used to speculate on or gain leveraged exposure to long-term price appreciation with less capital than buying shares.
* Can be sold before expiration for profit if the premium rises.

Puts
* Used to hedge long stock positions over a multi-year horizon.
* Gain value when the underlying falls, offsetting portfolio losses without short selling.

Advantages and disadvantages

Advantages
* Long time horizon helps capture multi-year trends or serve as a durable hedge.
One trade can replace a series of shorter contracts (less execution risk).
Available on many stocks and major indices.

Disadvantages
* Higher premiums than short-term options.
Capital is tied up for the contract term, reducing flexibility.
Sensitive to volatility and interest-rate moves; can still expire worthless, costing the entire premium.
* Selling LEAPS (writing options) can expose you to significant or unlimited losses depending on the strategy.

Example

An investor worried about a possible market decline over the next two years buys an index LEAPS put with a 3,000 strike, paying $300 for the contract. If the index falls below 3,000 by expiration, the put increases in value and offsets portfolio losses; if the index rises, the put may expire worthless and the investor loses the $300 premium.

Common questions

Are LEAPS a good investment?
They can be useful for long-term speculation or hedging but are not inherently “good” or “bad.” Their suitability depends on your view of the underlying, risk tolerance, and time horizon.

When should you buy LEAPS?
Consider LEAPS when you have a multi-year view—buy calls for long-term bullish bets or puts to hedge existing long positions.

Can you lose money with LEAPS?
Yes. Buyers can lose the entire premium if the option expires worthless. Sellers can face large or unlimited losses depending on position and underlying movement.

How are LEAPS taxed?
Profits are taxable. If a LEAPS position is held for longer than one year, gains may qualify for long-term capital gains treatment; otherwise, gains are taxed as short-term. Tax rules can be complex—consult a tax advisor.

Bottom line

LEAPS are long-dated options that provide leveraged exposure or multi-year hedges in a single, listed contract. They offer convenience and strategic flexibility but carry higher premiums and time-related risks. Understand pricing drivers, contract specifications (including whether options are physically or cash-settled), and the potential for total loss of premium before using LEAPS in a portfolio.