LEAPS Options For Long-Term Investing

If you are considering an options strategy, you may want to look into LEAPS (Long-term Equity AnticiPation Securities) if you are implementing a long-term investing strategy.

While investing in options carries significant risk, owning the option for a longer time frame is an appealing feature for many options investors.

There are also additional components that make LEAPS effective in a variety of situations.

LEAPS Options As An Alternative To Stocks

Long-term Equity AnticiPation Securities offer investors an alternative to direct stock ownership. A LEAPS call option affords investors the opportunity to profit from a rise in stock prices, while risking less capital than if you were to purchase the security directly.

If the price of a security were to rise above a certain level, then the owner of the LEAPS call option would have the right to buy the stock at the agreed upon price, referred to as the strike price, that is below the current cost of the security.

As an investor in LEAPS options, you can also sell your call options on the open market in order to realize profits.

Diversify With LEAPS Options

An investor may also utilize LEAPS call options in order to to diversify their portfolio. The stock market has historically afforded investors substantial and positive investment gains for the long-term.

There are few investors who purchase stock in each corporation they research. An investor who purchases a LEAPS call option has the privilege of to purchasing shares of stock at a specific date and cost for a time frame of up to three years in the future. Therefore, an investor with a long-term investment strategy can gain from purchasing LEAPS call options.

Hedge Against Risk With LEAPS Options

A LEAPS put option provides investors with a way to hedge their present stock positions. An investors should consider buying a LEAPS put option if they are worried about a potential price decline on securities that they possess.

By purchasing a LEAPS put option the buyer gains the right to sell the underlying stock at the strike price up until the option’s expiration date.

The Downside To LEAPS Options

When you purchase LEAPS call options or LEAPS put options, your risk is restricted to the price you paid for the position, also referred to as the premium. When you are an uncovered seller of LEAPS call options, there is unlimited risk, or a seller of LEAPS put options, significant risk.

Your risk will vary depending on the strategy followed, and it is crucial for an investor to realize fully the risks of each strategy.

Investing in options involves the risk of losing the entire investment amount in a comparatively short time frame and with comparatively modest movements of the underlying security. The purchase of an option involves “leverage,” whereby the value of the option contract generally will fluctuate by a greater percentage than the value of the underlying security, unlike the purchase of common stock for cash.

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