LEAPS

LEAPS are options contracts with expiration dates set more than a year out, sometimes as far as two or three years from the date they are listed, compared to the standard options that typically expire within a few months. They work exactly like ordinary calls and puts, giving the holder the right to buy or sell a stock at a set strike price, the only real difference is the much longer time until expiration.

Because they have so much more time value built into their premium, LEAPS cost significantly more upfront than options expiring within a few months at a similar strike price, but that extra cost buys the holder a far longer window for a thesis on the stock to play out. Investors sometimes use LEAPS calls as an alternative to buying shares outright, since a deep in the money LEAPS call moves closely with the stock while requiring a smaller amount of capital, a technique sometimes used to gain leveraged exposure similar to owning the stock while freeing up the rest of the capital that would have gone into buying shares directly.

LEAPS are also used for hedging over a longer horizon, buying a LEAPS put to protect a large stock position against a decline over the next year or two rather than needing to repeatedly buy and roll protection that expires every few months. The tradeoff for the extended timeframe is that LEAPS tend to be less liquid than options expiring sooner on the same stock, with wider bid-ask spreads, so trading costs can eat more into the value of the position than they would with a more actively traded contract closer to expiration.