An option offered by the CBOE gives the trader some interesting opportunities. I’m talking about LEAPS (Long term Equity AnticiPation Security). They were first issued in 1990. LEAPS are currently issued for about 2,500 equities, as well as approximately 20 ETFs. They always are for JAN expiration, last traded that months 3rd Friday. LEAPS are currently offered for, 2012 and 2013. The JAN12 LEAP expires in about 225 days. The JAN13 LEAP has roughly 589 days to expiration.
So why would anyone want an option that has such a long life? It will have a high intrinsic value, and you have to pay for that. The main advantage is cost; a LEAP allows us to take a position in a name at reduced cost. E.g., if I bought 500 shares of SPY outright, it would cost about $60,000.00 including the commission. Or, I could take a long position in the SPY13 LEAP instead, buying 5 SPY JAN13 119 calls for about $7,500.00 including commission. That allows me to control 500 shares of SPY for 12.5% of the equivalent cost of the underlying contract. Since the JAN13 LEAP has 589 days to expire, theta (price decay) is small, and we need not worry about expiration, at least for the near term.
The delta for the JAN113 119 call is about 0.53, which means the price of the option goes up (or down) about half as fast as the underlying SPY price. The deeper ITM we go, the higher the delta. So if I want my position to more closely follow the underlying price, I can buy 5 JAN13 70 calls for about $26,000.00 including commission, and have a delta of 0.90. The deeper in-the-money one goes, the higher the delta is, and the cost of the option is also higher. The deep ITM LEAP can get pretty expensive, though remaining much cheaper than the underlying contract (the stock).
So LEAPS allow us to take an option position in a name that closely follows the price behavior of the underlying, at a fraction of the cost. LEAPS, are a depreciating asset; they expire worthless at some future date. But because of the length of time involved, we can use them in the near to medium term as a substitute for the underlying.Those of us that are trading small accounts can take advantage of the reduced cost of LEAPS.