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LEAPS® – Options for the Long Term

Options involve risk and are not suitable for all investors.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.

Introduction

When considering any options strategy, you may want to think about Long-Term Equity AnticiPation Securities® (LEAPS®) if you are prepared to carry the position for a longer term. While using LEAPS® does not ensure success, having a longer amount of time for your position to work is an attractive feature for many investors. In addition, several other factors make LEAPS® useful.

Call LEAPS®: Stock Alternative

LEAPS® offer investors an alternative to stock ownership. LEAPS® calls enable investors to benefit from stock price rises while risking less capital than required to purchase stock. If a stock price rises to a level above the exercise price of the LEAPS®, the buyer may exercise the option and purchase shares at a price below the current market price. The same investor may sell the LEAPS® calls in the open market for a profit.

Put LEAPS®: Hedge

LEAPS® puts provide investors with a means to hedge current stock holdings. Investors should consider purchasing LEAPS® puts if they are concerned with potential price drops on stock that they own. A purchase of a LEAPS® put gives the buyer the right to sell the underlying stock at the strike price up to the option's expiration.
Select to close help pop-up A short call option in which the seller (writer) does not own the shares of underlying stock represented by his or her options contracts or an offsetting long call options contract. If assigned, the seller is obligated to deliver the underlying security at the strike price. As the writer does not own the underlying security, the writer may have to purchase the underlying security at any price in order to meet the obligation. This represents unlimited risk as the underlying security has unlimited upward potential.
Select to close help pop-up A short put option in which the seller (writer) does not own the cash equivalent of the exercisable value represented by his or her options contracts or an offsetting long put options contract. If assigned the seller is obligated to purchase the underlying security at the strike price. As the underlying security can go as low as zero, the writer faces substantial loss potential.

What's the Downside?

Stock vs. LEAPS®

There are many differences between an investment in common stock and an investment in options. Unlike common stock, an option has a limited life. An investor can hold common stock indefinitely, while every option has an expiration date. If an investor does not close out or exercise an option prior to expiration, it ceases to exist as a financial instrument. As a result, even if an option investor correctly picks the direction the underlying stock will move, unless the investor also correctly selects the period that movement will take place, the investor may not profit.

Stock vs. LEAPS®

There are many differences between an investment in common stock and an investment in options. Unlike common stock, an option has a limited life. An investor can hold common stock indefinitely, while every option has an expiration date. If an investor does not close out or exercise an option prior to expiration, it ceases to exist as a financial instrument. As a result, even if an option investor correctly picks the direction the underlying stock will move, unless the investor also correctly selects the period that movement will take place, the investor may not profit.
Options investors run the risk of losing their entire investment in a relatively short period and with relatively small movements of the underlying stock. Unlike a purchase of common stock for cash, the purchase of an option involves leverage. Leverage indicates that the value of the option contract generally will fluctuate by a greater percentage than the value of the underlying interest.
Content licensed from the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell any option or any other security. Options involve risk and are not suitable for all investors.

Content licensed from the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on Merrill's Website, or other Company Materials not provided by OIC. OIC education can be accessed at the OIC web site popup.

Without the Jargon

LEAPS® are options that have an expiration date greater than 1 year — hence the name Long-Term Equity Anticipation Securities. LEAPS® have the same anatomy as shorter dated equity options in terms of amount of contracts, underlying security, strike price, and expiration date. LEAPS® longer term expiration is what differentiates the option type from traditional equity options.
Information not provided by the Options Industry Council
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
View definitions for investment terms in our Glossary.
The material was provided by a third party not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.

Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be furnished on request.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

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