LEAPS: Options for the Long Term - Part 2
...Continued from Part 1
Options investors run the risk of losing their entire investment in arelatively short period of time and with relatively small movements ofthe underlying stock.
Unlike a purchase of common stock for cash, thepurchase of an option involves "leverage," whereby the value of theoption contract generally will fluctuate by a greater percentage thanthe value of the underlying interest.
WHAT ARE LEAPS?
LEAPS are simply long-term options that expire at dates up to 2 years and 8 months in the future, as opposed to shorter-dated options that expire within one year.
LEAPS grant the buyer the right to buy, in the case of a call, or sell, in the case of a put, shares of a stock at a predetermined price on or before a given date.
Equity LEAPS are American-style options, and therefore may be exercised and settled in stock prior to the expiration date. The expiration date for Equity LEAPS is the Saturday following the third Friday of the expiration month.
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HOW LEAPS WORK
LEAPS are quoted and traded just like any other exchange listed option. In fact, many of the features of LEAPS® are the same for shorter-term options:
- Number of shares covered by the contract (100)
- Exercise and assignment procedures
- Trading procedures
- Margin and commission costs
However, LEAPS differ from shorter-term options in several ways including availability, pricing, time erosion vs. delta effect, symbols and strategies.
To Be Continued...
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