LEAPS Option Strategies

Buying Equity LEAPS Calls To Anticipate A Rally

Stock Assumption:	Bullish
Situation:	An investor anticipates an advance in the stock of one of the LEAPS issues over the next two years.
Possible Market Action:	Buy Equity LEAPS® Calls

An investor anticipates an advance in the price of a stock underlying a LEAPS issue over the next two years. He would like to profit from a rise in the stock without having to purchase the shares.

ZYX is currently trading at 50.50 and a 2 year LEAPS call with a 50 strike price is trading for 8.50. The investor purchases five of these for $4,250. These five calls give him the right to buy 500 shares of ZYX between now and expiration at 50 no matter how high the stock should rise. The break-even level in this example is 58.50 (strike price + premium paid)

If ZYX advances to 65 by this date, the individual has the choice of exercising the five calls and taking delivery of the stock by paying $50 per share or selling the LEAPS for a profit. At expiration, the LEAPS will be trading for at least 15 with ZYX at 65.

Buy Five LEAPS ZYX 50 Calls
Closing Sale Price (5 x 100 x 15):	$7,500
Less premium paid (5 x 100 x 8.50):	$4,250
Profit in this situation:	$3,250

The risk is only the total cost of the calls, $4,250 plus commissions if ZYX does not rise above 50 by the expiration date.

The LEAPS may trade somewhat higher than the difference between the 50 strike price and actual stock price due to the possibility that the stock price may increase over the time remaining to expiration. This is known as time value and the amount of time value contained in an options premium will decrease as expiration approaches.

Commissions, dividends, margins, taxes and other transaction charges have not been included. However, they will affect the outcome of option transactions and should be considered. The strategy discussed above is for illustrative and educational purposes only and should not be construed as an endorsement, recommendation or solicitation to buy or sell any particular security.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. The inclusion of non-CBOE advertisements on the website should not be construed as an endorsement or an indication of the value of any product, service, or website. The Terms and Conditions govern use of this website and use of this website will be deemed acceptance of those Terms and Conditions.