Also known as long-term equity anticipation options, LEAP options are contractual agreements that allow investors to buy and sell shares of stock at a fixed price at any point between the start date and the expiration date associated with the agreement. This is true even if the market value of those stocks far exceed the fixed price named in the contract. However, it is important to note that the buyer is not under an obligation to purchase the shares, unless he or she feels doing so is a good investment strategy.
While there are a number of option strategies that allow buyers to make purchases with special terms, LEAP options tend to make use of an expiration date that is much further in the future than similar option agreements. This allows investors to project the long-term trends in the market place which are likely to impact the performance of the shares, either by increasing or decreasing the value of the shares. Assuming the projection is based on reliable data, this can help the investor determine how many shares to purchase at some point before the market price begins to climb. The investor will also have an idea of when to sell those shares under the terms of the LEAP options terms just before the unit price begins to fall, and when to purchase more shares in anticipation of another climb. Throughout this process, the fixed price identified in the option contract terms makes it possible for the investor to always know what the initial investment will be to secure a certain number of shares.
In making the most of LEAP options, investors pay attention to more than projected performance and the fixed price included in the terms of the options contract. They also consider factors like the call price for the stock and the commission fees that are assessed as part of a brokerage arranging for the buying and selling of the shares. This is especially important if the shares are held right up to the date that the option expires.
When the shares purchased as part of LEAP options are held all the way to the expiration date, the investor often wants two things to happen. First, the value of the shares on the expiration date, known as the call price, must exceed the fixed price that was used for the purchase of the shares. Second, that call price must be sufficient to also offset all trading and broker fees incurred over the time that the investor was involved with the option, as well as cover the original purchase of the shares. If the call price does not at least cover these two costs, then the investor loses money on the option, rather than realizing a return.
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