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Rolling LEAP Options

Updated on February 23, 2024
Article byGayatri Ailani
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Rolling LEAP Options?

Rolling LEAP options refer to extending the trading duration of long-term stock options, known as LEAPs (Long-Term Equity Anticipation Securities), to the next trading period. It is an advanced strategy that requires careful consideration of market conditions, underlying stock performance, volatility, and other relevant factors.

Rolling Leap Options

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Investors can extend their exposure to the market and maintain their positions for longer. Generally, this can be beneficial when they believe the underlying asset’s price will continue to move in their desired direction beyond the original expiration date. It allows them to buy additional time for the market to move favorably before deciding to exit the position.

Key Takeaways

  • Rolling LEAP options refers to a strategy where an investor closes an existing options position and simultaneously opens a new options position with different parameters, such as a different strike price or expiration date.
  • LEAP options differ from regular options because they have a longer expiration period, usually more than one year. This extended time frame allows investors to take positions on the anticipated future movement of the underlying asset over a longer period.
  • Investors use rolling LEAP options for various reasons, such as speculating on price movements, hedging against potential losses, or gaining exposure to an asset without actually owning it.

Rolling LEAP Options Explained

Rolling over options refers to closing an existing option position and simultaneously opening a new position with a later expiration date. This process allows investors to extend the trading duration of their options contracts. It is an inexpensive method since it involves selling an option with similar characteristics at the same time. In other words, it works like a cost-effective stock replacement strategy for underlying assets with low volatility.

The process involves:

  • Evaluate the Current Position: Assess the performance of your existing options position. Consider factors such as the current market price of the underlying asset, the remaining time until expiration, and the profit or loss on the position.
  • Select the New Expiration Date: Choose a new expiration date that aligns with the desired trading duration. Depending on expectations for the underlying asset’s performance, it can be the next available expiration date or a later date.
  • Execute the Roll Over: To roll over the options, one needs to close the existing position and open a new position with a later expiration date and chosen strike price. This typically involves placing two orders with the broker: one to close the current position and another to open the new one. Ensure that one specifies the desired expiration date and strike price for the new position.
  • Manage Transaction Costs: Be aware that rolling over options involves transaction costs, such as brokerage fees or commissions. Consider these costs when evaluating the potential profitability of the rollover.

When To Use?

Depending on an investor’s objectives and market conditions, rolling LEAP options can be used in various situations. Here are a few scenarios where rolling LEAP options may be considered:

  • Managing Losing Positions: If an investor holds LEAP options that are in a losing position, they may choose to roll over the options to extend the time horizon. By doing so, they provide themselves with additional time for the underlying stock to potentially recover and move in their favor. Rolling over options can be a strategy to mitigate potential losses or give the stock more time to meet their expectations.
  • Capitalizing on Market Volatility: If the market is experiencing significant volatility or anticipated events that could impact the stock price, investors may opt to roll over LEAP options. By extending the expiration date, investors can maintain their exposure to potential price movements and potentially benefit from increased volatility.
  • Adjusting Investment Strategy: Rolling over LEAP options allows investors to adapt their investment strategy based on changing market conditions or new information. If there is a shift in the outlook for the underlying stock, investors may adjust their position by rolling over options to align with their revised expectations.
  • Taking Advantage of Opportunities: Rolling over LEAP options can be a way to seize new investment opportunities. Suppose investors identify a favorable entry point for a stock but want to extend their holding period. In that case, they can roll over their options to capture the potential gains from the anticipated price movement.

Examples

Let us look at rolling LEAP options examples to understand the concept better.

Example #1

Suppose an investor owns LEAP call options expiring in a year. However, a market downturn causes the underlying stock price to drop. Instead of selling at a loss, the investor chooses to roll over the options. The investor sold and replaced the current option with another two-year option, giving the stock more time to rise.

Example #2

Suppose an investor holds LEAP put options expiring in a year. Unexpectedly, the stock soars to a higher price point, putting the options “out of the money.” Instead of losing the entire investment, the investor rolls over the options. By closing the current position and opening a new one with the same strike price but a later expiration, the investor expects to benefit from a potential future decline in the stock’s value.

Rolling LEAP Options vs Shares

The differences between the two are as follows:

SharesRolling LEAP Options
To buy shares, investors pay the market price per share.Investors pay a premium that is lower than the price for the total number of shares specified (less capital outlay)
Less complexOffers more flexibility

Frequently Asked Questions (FAQs)

1. What are the benefits of rolling LEAP options?

The strategy gives investors the advantage of lengthening their exposure to the market, allowing for longer positions. This flexibility provision is important for investors and can be beneficial when investors expect continued favorable movements in the market but beyond the original expiration date, offering more time for strategic decision-making.

2. What are the risks of rolling the LEAP option?

Rolling LEAP options come with inherent risks. Firstly, the strategy exemplifies a complex process and mandates experience to implement it successfully. Also, market scenarios may not align with expectations, leading to potential losses. Additionally, transaction costs can reduce profit, and incorrect analysis of the underlying asset’s performance may result in unfavorable outcomes.

3. What are the tax effects of rolling LEAP options?

Tax implications for rolling LEAP options depend on factors like the holding period and gains or losses from the options. Generally, rolling over options does not cause immediate tax effects.

This article has been a guide to what is Rolling LEAP Options. Here, we explain its examples, when to use it, and comparison with shares. You may also find some useful articles here –

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