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What are Long-Term Anticipation Securities (LEAPS)?

When it comes to trading options, most investors operate with a short-term mindset. They’re looking to capitalize on price appreciation or a short position in the next several months. Most times, they’re in and out of an option contract within a quarter or two. There are, however, longer-term options: Long-Term Anticipation Securities (LEAPS). These are special options with expiration dates of up to one, two, or three years in advance. 

Long-Term Anticipation Securities are an interesting proposition that combines the best in both investing and trading. Those who see time in a position as a positive will hold LEAPS for more than a year, while also leveraging the multiplication factor that accompanies options trading. The result? Done right, it’s a bet on the future that yields significant returns thanks to the power of leveraged appreciation. 

Here’s what you need to know about LEAPS: how they work and how to leverage them as part of a longer-term trading strategy. 

Learn about Long-Term Anticipation Securities

Long-Term Anticipation Securities vs. Short-Term

Most short-term options range from 30-60 days (front months), with some going as far out as 90 days (back months). It all depends on the options cycle. Nevertheless, options traders traditionally want to exercise these options quickly, to downplay price volatility. Once they’re in the money, they exercise the option. 

Long-term options demand the opposite approach. Investors tend to hold Long-Term Anticipation Securities for hundreds of days—up to two and a half years in many cases. They’re also looking to avoid price volatility—they’re just banking on time to smooth out the peaks and troughs. In doing so, they’re willing to put up with a greater theta decay.

Here’s a look at some of the other ways short- and long-term options differ, and how the strategy for trading them diverges: 

  • Less Liquidity. Near-term options have very small bid-ask spreads. The further out you go, the wider the bid-ask. However, that also means sacrificing liquidity. Less open interest in contracts far into the future means you’ll deal with less liquidity overall.
  • Expense/Price. LEAPS are expensive because there’s tremendous potential for price movement the further out you go. In the span of 300-600 days or longer, there’s much more opportunity for the price to rise or fall, as opposed to a 30-60-day period.
  • Incredible Leverage. Most traders use options to leverage their position. LEAPS offer an incredible opportunity to enhance that leverage in an even greater way. The long-term outlook on Long-Term Anticipation Securities hannels time into extrapolative price appreciation. 

LEAPS Offer Put and Call Options

As a form of options trading, there are both Long-Term Anticipation Securities puts and calls to consider. As is the case with general options, the right investment depends on your bullish or bearish outlook:

  • LEAPS Put Options offer an underlying hedge if you own the security in question. If the stock does poorly, the puts will serve to offset the losses incurred via price depreciation. 
  • LEAPS Call Options give traders the ability to benefit from price appreciation without actually buying the stock. This enables a greater degree of leverage, at a lower cost. 

Whether you’re bullish or bearish on a stock, if you’re a believer in long-term targets, Long-Term Anticipation Securities offer a way to both hedge your investing philosophy and bring leverage into the fold for a strong ROI. 

Tips for Trading LEAPS

Trading LEAPS takes a mind for both long-term investing and options trading. It’s a tricky balance to strike. Here are a few tips to keep in mind:

  • Remember that you don’t need to hold LEAPS until expiration and can exercise the option at any time. It’s important to pay attention to market and price movements in the near-term, while holding for the long-term. Dramatic short-term price appreciation could be a great opportunity to strike, before pullback on the stock. 
  • Pay very close attention to open interest when investing in Long-Term Anticipation Securities. Interest will directly impact liquidity. Find a happy medium between a time horizon with strong price appreciation capabilities and a relatively low open interest. Keep in mind that this can change dramatically over short periods of time, depending on the security in question.
  • Not every stock or sector has good LEAPS. Cyclical industries and those difficult to predict will have almost nonexistent Long-Term Anticipation Securities due to lack of interest. As a result, it’s often a smart idea to explore a sector-based ETF or a focused fund. The more active the fund, the stronger the LEAPS opportunities, generally.

It’s smart to master basic options trading before trying LEAPS. While there’s a mitigated risk that comes with Long-Term Anticipation Securities, it’s still important to understand and safeguard against any risks that can come from a LEAPS contract that’s out of the money. 

What About Implied Volatility?

Implied volatility is something every options trader needs to take into account. However, there’s almost no implied volatility when it comes to LEAPS. In fact, they are largely stable in comparison to short-term options. There’s still risk in holding options long-term, but it’s very mitigated by comparison to 30-60-day options. Barring extreme market downturn or major financial troubles for individual securities, it’s a relatively safe bet to identify price appreciation and trade LEAPS. That said, no option is without risk. 

The Power of Leveraged Price Appreciation

Investors buy and hold a security because they believe the price will appreciate long-term. If you’re bullish long-term, why not leverage that bet? Long-Term Anticipation Securities offer investors the longer time horizon they want, with the leveraged opportunities of options trading. The result? A powerful position that could pay dividends in one, two or three years. And while there’s risk associated with options that fall outside the money, a careful, measured approach to investing makes LEAPS a safer bet than short-term puts or calls.

To learn more about options trading, sign up for the Trade of the Day e-letter below. You will find invaluable information on LEAPS and various other investment opportunities.


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