LEAPS
Categories: Derivatives, Investing
LEAPs are "long-dated options."
We're talking about any call or put options that last for many months (or even years) rather than having an exercise date that comes up in a month or two.
Hint: if you see an option with a date that is at least nine months away, you're dealing with a LEAP.
Just like any option, you can trade this option, and if the value of the underlying stock goes up or down, you can make money from the option. LEAPs are often used by people who own stocks and who want to make money without selling the stocks themselves. LEAPs can also be a way to start investing if you want to trade in options without buying stocks.
Example
Weird Uncle Fester always had a thing for light bulbs. Then he died and left you his fortune, which amounts to 10 million shares of GE. You are very happy being worth a few hundred million dollars and just don't want to lose that money. But if you sell the shares, you will pay a tax because the IRS views that process as a "constructive sale." But you would likely be able to construct a LEAP which hedges your position and allows you to play golf all day and quit the burger flipping gig you used to have.