LEAP securities are long-term equity, index, and sector options created by the CBOE as an alternative for long-term investors. They have terms up to three years and can be traded using traditional options strategies, but are sensitive to interest rates.
Long-Term Capital Anticipation, or LEAP, securities are equity, index and sector options with very long terms to expiration. They were created by the Chicago Board Options Exchange (CBOE) to offer an alternative to investors with long-term investment strategies.
The CBOE offers a wide selection of LEAPs. Index LEAPs are available for major US indices such as the Dow Jones Industrial Average, S&P 500, and Nasdaq 100, as well as international benchmarks covering the China, European, Japanese, and Mexican markets. . Similar values have also been introduced for industrial sectors, which encompass banking, oil services, telecommunications, health care and other important elements of the economy. Equity LEAPs are available to sole proprietorships. Details on current offers can be obtained from the CBOE.
Like traditional options, these securities give the holder the right to buy or sell the underlying asset at an agreed price over an agreed period of time. While traditional stock options are available with expirations ranging from one to three months, these securities have terms that extend up to three years. Both put options and call options are available. Index LEAPs are generally European-style and can only be exercised at expiration. Equity LEAPs are generally US-style and can be exercised at any time prior to expiration.
LEAPs can be quoted using Black-Scholes pricing models and can be traded using the same strategies as more traditional options. Investors can buy LEAP puts to protect long-term stock positions or buy LEAP calls if they expect a long-term bull market. Spreads, the simultaneous buying and selling of options at different strike prices, can also be implemented with this type of security, as can strategies designed to profit from changes in market volatility.
The long maturity of LEAPs introduces some complexities. They are very sensitive to interest rates, which are likely to change over the life of a LEAP. In a rising interest rate environment, for example, LEAP puts can actually trade negative cash value. This is especially important for equity LEAPs, as there is a strong incentive for holders to elect to exercise early.
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