LEAPS

LEAPS stands for Long-Term Equity Anticipation Securities. Despite the fancy name, a LEAPS contract is just a regular stock or index option — a call or a put — with one distinguishing feature: it has a much longer expiration date than a typical option.

Ordinary options usually expire within days, weeks, or a few months. LEAPS are the same instruments, giving the holder the right (but not the obligation) to buy (call) or sell (put) shares of the underlying stock at a fixed strike price, but the expiration is set out more than a year from when the contract is listed, and some run out two or three years ahead. Because there's so much time left on the clock, their price behaves differently from short-dated options: they lose time value much more slowly day to day, and a bigger share of the premium reflects the stock's expected long-run movement rather than short-term noise.

The nuance that trips people up is thinking LEAPS are a separate product or asset class. They aren't. When a LEAPS contract gets close enough to expiration, it stops being called a LEAPS and just becomes a regular option — nothing changes mechanically, only the label. People also assume all stocks offer LEAPS; in practice only a subset of optionable names have long-dated contracts listed, and the strikes available may be limited compared to near-term expirations.

Traders sometimes use LEAPS calls as a stand-in for owning the stock outright, tying up less capital while still getting long-term upside exposure, though this comes with its own risks like time decay and the option expiring worthless if the stock never gets there.