Low Exercise Price Option (LEPO): Meaning, Pros and Cons
A low exercise price option (LEPO) is a European-style call option with a strike price of one cent. Because the strike is effectively zero, LEPOs trade like the underlying stock and behave similarly to a futures or forward contract: exercise at maturity is almost certain. Both buyers and sellers trade LEPOs on margin, and positions can be closed before expiry to avoid taking delivery.
How LEPOs work
- Strike price: typically one cent (near zero), making the option deep in the money.
- Style: European — exercise only at expiration.
- Margin: both buyers and sellers post and maintain margin; ongoing margin calls are possible.
- Economic exposure: high delta means price moves closely follow the underlying stock.
- Ownership rights: holders do not receive dividends or voting rights until after exercise/delivery.
- Settlement: because exercise is nearly guaranteed, LEPOs act like an obligation to take delivery unless closed prior to expiry.
How LEPOs differ from standard options
- Only available as calls (no put LEPOs).
- Deep in the money versus typical options that span a range of strike prices.
- Traded on margin rather than paying the full premium upfront.
- Functionally similar to futures/forwards due to near-certain exercise.
- No dividend or voting entitlements until conversion to shares.
Advantages
- Stock-like exposure with lower upfront capital because positions are margined.
- High delta provides close participation in the underlying’s price movements.
- Can be used to gain leverage or to replicate long stock exposure without immediate full purchase.
Disadvantages and risks
- No dividends or voting rights until exercise — income and governance benefits are delayed.
- Margin requirements and potential margin calls introduce leverage risk.
- Deep ITM options carry large nominal premiums; while margined, these reflect significant underlying exposure.
- Counterparty and settlement risk if the exchange or clearing arrangements differ from standard stock clearing.
- Not widely available on all exchanges (commonly offered on some international exchanges, not on U.S. exchanges).
Where LEPOs are traded
LEPOs originated in Europe and have been adopted by some exchanges (for example, the Australian Stock Exchange has listed LEPOs since the 1990s). Availability and specific contract terms vary by market.
Practical considerations
- Understand margin mechanics and worst-case margin scenarios before trading.
- Consider dividend timing and corporate actions, since holders lack rights until exercise.
- Use selling-to-close as an alternative to taking delivery if you do not want to become a shareholder.
- Check liquidity and contract specifications on the exchange where the LEPO trades.
Key takeaways
- A LEPO is a near-zero-strike, European-style call that behaves like the underlying stock and resembles a futures contract.
- Both sides trade on margin, and exercise at expiration is almost certain.
- LEPOs offer leveraged stock exposure with lower upfront cost but carry margin, dividend, and ownership trade-offs.