LEAPS

LEAPS are options with longer-term (a year or longer) expirations compared to most common options. As in the case of common options, LEAPS come in two types: puts or calls. The name is and acronym, derived from the phrase “Long-Term Equity Anticipation Security”. LEAPS always expire in the third week of January. They are available on thousands of stocks and many indexes.

One of the characteristics of LEAPS is that their value wastes away very slowly during their early stages of life. Thus, they can be much more stable than short-term common options, whose value is always decaying at an accelerating rate as the expiration date approaches.

So, how can the conservative options seller use LEAPS. After all, we are normally interested in selling short-term out-of-the-money options to generate relatively frequent income. Yes, this is true, but there are some circumstances when we might consider using LEAPS.

LEAPS can be utilized very effectively as the long side in a calendar spread. Because they do not waste away as rapidly as short-term option, they can often be used to sell numerous, consecutive monthly short-term options against them.

If you own stock that you really don’t want to sell and you’d like to hold for a decade or more, consider selling next years’ out-of-the money LEAPS against that stock. Even for far-out-of-the-money LEAPS, you can collect a good premium because the options expiration date is so far away.

Likewise, selling very deep-out-of-the-money LEAP puts might be an interesting strategy to consider. As in the case of a LEAP covered call, the premium you receive can be quite substantial, even if they are very deep-out-of-the-money.