Share Market

Before dwelling in the advantages of using LEAPS in option trading let us first try and understand what does one mean by the financial lingo LEAPS. In the world of options, LEAPS which stand for Long Term Equity Anticipation Security are options which have long term until expiry than other common options, say a period of 3,6 and 9 months with no options lasting more than one year. As like all options, LEAPS also contain two forms, calls and puts.

In options, Equity LEAPS always expire January. Say suppose, if a contract is purchased in July 2005 of ABC Company, one would buy a call option of that company which would expire in 2007 or 2008, thus being called a LEAP.

The financial instrument provides a powerful tool risk/reward picture and allows for a significant capital savings. They are generally powerful tool for trend followers.

After a brief understanding of LEAPS, let`s get to the understanding of what are the advantages of instruments. The advantages are as under:

A tool for diversification: The instrument allows a tool for diversification. As buying LEAPS is cheaper than buying an equity instrument, LEAPS can allow more markets to be traded.

A Leverage Tool: The instrument more often can be used as a leverage tool as they cost the fraction of the underlying equity. Say suppose, an equity instrument moves from Rs 5 to Rs 10, it will show a 100% gain. Meanwhile, a LEAP on the same issue will move from 1 to 5 will show a 400% gain.

Minimal Time Decay: While all options decay over a period of time, LEAPS by nature have vast amount of time before expiration, typically nine months of an options. At nine months before expiration, LEAPS become traditional options.

Good use of retirement money: The financial instrument

LEAPS allow traders to trade a trend following method in a retirement tax shelter. LEAPS allow for both sides of the trend to be traded, increasing the number of trends that can be traded, and potential returns.