Finance: What are LEAPs?

LEAPs are long-dated options. No, not options that are dropping hints about marriage - put or call options with lengthy durations.

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Transcript

00:29

are priced at most about six months out banks like to be liquid and should

00:35

the market swing violently even if they lose while they want to know how much [Market riding a swing]

00:40

they've lost within a very short period of time so LEAPs take on a different

00:45

life with vastly different durations or time or theta if you want to get all

00:51

Latin.. you can imagine yourself as an investor in a hundred times revenue [Woman sitting at her desk]

00:55

superfast growth internet something whiz-bang company dot-com you've made

01:00

200 million dollars in your investment more dough than you ever dreamed you'd

01:05

need and definitely worth a pile of cash selfie so all you care about now is [Person looks at selfie with cash]

01:10

locking in your gains but also not being stupid in case this really is the next

01:15

Google so you want to lock in your gains there and you know what they say about

01:18

Wall Street people investing hogs eat well but you know pigs get slaughtered

01:23

something like that so you would really like to sell your stock but you're

01:27

waiting to move from a blue state to a red state and save one-sixth of your

01:32

gains so you want to wait to sell but you're nervous in the interim two years [Woman biting her nails]

01:36

that your shares in you know facepage will plummet from two hundred fifty

01:41

bucks a share to 20 and well then you have to go back to work this is where

01:45

LEAPs come in they're kind of life insurance for wealth you want to buy a

01:49

two-year LEAP that protects you from huge downside and you do the math at

01:53

$100 a share well you still don't need to go to work ever again you'd have like

01:58

a hundred million instead of two hundred million, you may only be able to afford a

02:02

Winnebago but well you'll survive without relying on raman [Woman eating on a park bench]

02:05

noodles for sustenance so what do you do well you get a quote from an investment

02:10

bank who trades in your stock and learn that for $10 a share you can lock in

02:15

your $100 a share price for two years meaning you're paying 10 bucks betting

02:20

that that stock won't go from $200 in change all the way down to below $100 in

02:26

two years and the bank is betting that it will remain above $90 at which point

02:31

well you know they'd make profit right so from your end

02:35

if the stock went cataclysmically awful like the seven dollars and twelve cents [Stock prices drops to 7 dollars per share]

02:39

a share because there was fraud and murder and deceit and all kinds of bad

02:43

things well you'd still net $90 a share because you're paying that $10 a share

02:48

today and the bank even if the stock was seven dollars and twelve cents two years

02:53

from now they'd pay you $90 a share for your business yeah and that'll just have

02:58

to do and besides not having to work well it leaves you plenty more time to

03:01

take selfies albeit with smaller piles of cash [Woman takes selfie and small pile of cash appears on sofa]