Leap OptionsLeap options give the buyer leverage in stock moves that can last a long time. They are long option contracts that produce a much higher gain then just buying the stock. Each leap gives the buyer the right, but not the obligation to buy a stock at a certain strike price on or before a given date. For Example, we buy a call leap option 2 years out with a strike price of $50. We pay $20 for this right.
Max Gain The most we can gain from buying a leap option is potentially unlimited. And our returns buying the leap will always be higher than buying the stock provided the stock makes a good sized move in the time frame. Think about it this way. We could have bought the stock at $50 and would have profited from a big move in the stock. Instead we bought the call leap for $20 and would profit from the same move. If we buy a leap put option on the other hand our potential profit is limited because the option can only go down so much. If the stock is at $50 it can only go down to $0 and therefore we can only potentially make $50 if we are right. Max Loss The most you could potentially lose is the amount you paid for the leap, in this case $20. However you can always utilize strategies like stop losses to limit. For example we could place a stop on this order at $10. This way if the option gets to $10 we would exit the trade for a loss but we would keep some of our initial investment. My Experience Leaps are like any other kind of options. They can be bought, sold, there are calls and puts. One thing that you should remember, even though these are long option contracts they can still expire worthless. You can’t use them to invest for the long haul if that means holding it for any more than a the life of the contract. |
