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LEAPS are available on approximately equities and 20 indexes. Options were originally created with expiry cycles of 3, 6, and 9 months, with no option term lasting more than a year.
Options of this form, for such terms, still constitute the vast majority of options activity. LEAPS were created relatively recently and typically extend for terms of 2 years out. For example, if today were November , one could buy a Microsoft January call option that would expire in , , or When LEAPS were first introduced in , they were derivative instruments solely for stocks ; however, more recently, equivalent instruments for indices have become available.
LEAPS are often used as a risk reduction tool by investors. The owner of the stock essentially creates the LEAP. The result at the expiry of the LEAP can be determined from its exercise price. LEAPs are written for a wide variety of exercise prices. If the close is higher than the exercise price, the LEAP typically will automatically be exercised by the broker.
The buyer can then sell the stock. Most often the buyer of the LEAP is a speculator who hopes that the stock will rise enough in market price for him to make a profit when the LEAP expires. From Wikipedia, the free encyclopedia.
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