28 lines
2.0 KiB
Plaintext
28 lines
2.0 KiB
Plaintext
CHAPTER 25
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LEAPS
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In an attempt to provide customers with a broader range of derivative products, the
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options exchanges introduced LEAPS. This chapter does a fair amount of reviewing
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basic option facts in order to explain the concepts behind LEAPS. The reader who
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has a knowledge of the preceding chapters and therefore does not need the review
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will be able to quickly skim through this chapter and pick out the strategically impor
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tant points. However, if one encounters concepts here that don't seem familiar, he
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should review the earlier chapter that discusses the pertinent strategy.
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The term LEAPS is a name for "long-term option." A LEAPS is nothing more
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than a listed call or put option that is issued with two or more years of time remain
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ing. It is a longer-term option than we are used to dealing with. Other than that, there
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is no material difference between LEAPS and the other calls and puts that have been
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discussed in the previous chapters.
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LEAPS options were first introduced by the CBOE in October 1990, and were
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offered on a handful of blue-chip stocks. Their attractiveness spurred listings on
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many underlying stocks on all option exchanges as well as on several indices. (Index
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options are covered in a later section of the book.)
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Strategies involving long-term options are not substantially different from those
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involving shorter-term options. However, the fact that the option has so much time
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remaining seems to favor the buyer and be a detriment to the seller. This is one rea
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son why LEAPS have been popular. As a strategist, one knows that the length of time
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remaining has little to do with whether a certain strategy makes sense or not. Rather,
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it is the relative value of the option that dictates strategy. If an option is overpriced,
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it is a viable candidate for selling, whether it has two years of life remaining or two
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months. Obviously, follow-up action may become much more of a necessity during
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the life of a two-year option; that matter is discussed later in this chapter.
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