While LEAPS can run past two years, their exchange-traded alternatives last for three, six, or nine months. Needless to say, time is the major distinction between these options. But first, what are options?
They’re instruments permitting an asset’s purchase or sale at specified strike values during or before its expiration. The option becomes a call if the holder anticipates a surge in the primary asset’s value and a put if they expect a dip.
The fact that they give the speculated stock more time to unfold makes them less prone to time decay. Considering decay increases with an approaching expiration, the delta is higher in LEAPS than other options. This explains the close relationship between LEAPS and their underlying stocks.
Their time advantage, however, renders them more expensive than near-term options. Moreover, LEAPS involve higher capital risks because of their hefty initial premiums. Worse still, they’re not available for all optionable stocks.
The good news is LEAPS go beyond conventional options trading to offer hedging. In addition to being a wide-scale put cushion, index LEAPS safeguard your portfolio against industry-specific threats.