Options and Leaps

Investment Dictionary -> Options and Leaps

The trading of options employs several phrases all unique to the options' market. Some phrases that are often used but generally misunderstood include call and put options.

A Call represents an optionís contract that entitles the buyer with rights to exercise the option and acquire the underlying commodity at the strike price at any time up to the date it expires.

An options trader can be a long Call or a short Call. In the first case, the trader has bought the call contract and has the right to exercise it. In the second case, the trader has sold the call contract, which means that he may be also required to sell the underlying commodity in order to complete the contract obligations.

A Put is a contract which entitles the buyer with the rights of selling the underlying commodity at any time up to the date it expires or at the strike price.

Option contracts that are publicly traded for a period longer than a year are called LEAPS. Their structure does not differ from the short term options. However, the expiration date gives the investors the opportunity to gain exposure to price changes over a longer period of time. In this way, they will not need to combine short term options. The increased expiration date of LEAPS, compared to the standard options, makes them premium because of the expiration date that is increased over time. This gives the asset additional time to make a move, and the investor has a possibility to make a profit.

Through the Long Term Equity Anticipation Securities? the traderís exposure to a given security is prolonged, without the need of using more than one short term contracts together. The possibility to buy a put or a call option that will expire in one or two years, lures the holder due to the long-term price movement exposure.

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