A Quick and Complete Overview of LEAPS [OPTIONS]

Long-term Equity AnticiPation Securities, more commonly referred to as LEAPS, are call and put options with up to three years' worth of shelf life. LEAPS are fundamentally the same as standard stock options; they just have longer-term expiration dates. Generally speaking, whatever you can do with a front-month option, you can do with LEAPS -- whether that's hedging, speculating, or generating income.

If you're long-term bullish on a stock's prospects, LEAPS can be a worthwhile investing alternative to buying the shares outright. While you won't be eligible for shareholder benefits, such as dividends and voting rights, LEAPS offer a limited risk profile and leveraged profit potential as compared to stock ownership.

Plus, compared to short-term calls and puts, LEAPS afford more time for a stock's move to develop in your favor. They also suffer less from time decay, which occurs relatively slowly on these long-term contracts. Since time decay doesn't really accelerate until expiration draws closer, option buyers may prefer to use LEAPS to play intermediate-term directional moves.

Due to the lessened impact of time decay, LEAPS tend to have high deltas, which means they behave very much like the underlying stock. This ramps up the benefits of leverage in your favor.

That said, it's important not to be lulled into a false sense of security by the healthy dose of time value bundled up in a LEAPS option. If a trade is breaking down or otherwise not performing up to expectations, don't reassure yourself that it has time to recover. Instead, you might be better off closing out the trade before time decay has a chance to kick in and erode any remaining value on the position.

Overall, LEAPS offer a happy medium between aggressive short-term option plays and traditional buy-and-hold stock ownership. LEAPS aren't available on every optionable stock, but you may want to consider adding some of these longer-term positions to your portfolio when the right opportunity arises.