LEAPS
LEAPS® are simply long-term options that expire up to two years and eight months in the future, as opposed to shorter-dated options that expire within one year.
LEAPS® grant the buyer the right to buy, in the case of a call, or sell, in the case of a put, shares of a stock at a predetermined price on or before a given date. Equity LEAPS® are American-style options. Therefore, they may be exercised and settled in stock prior to expiration. The expiration date for equity LEAPS® is the Saturday following the third Friday of the expiration month, which is typically in January.
LEAPS® are quoted and traded just like any other exchange-listed option. In fact, many of the features of LEAPS® are the same for shorter-term options:
LEAPS® differ from shorter-term options in several ways including availability, pricing, time erosion vs. delta effect and strategies.
The covered call is a widely used, conservative options strategy. It requires selling (writing) a call against stock. Investors utilize this strategy to increase return on the underlying stock and provide a limited amount of downside protection.
The maximum profit from an out-of-the-money covered call is realized when the stock price is at or above the strike price at expiration. The profit is equal to the appreciation in the stock price (the difference between the stock's original purchase price and the strike price of the call) plus the premium received from selling the call.
Investors should be aware of the risks involved in a covered call strategy.
The writers cannot benefit from any increase in the stock above the strike price (plus the premium received) since they are obligated to sell the stock at the call's strike price upon assignment. The downside protection for the stock provided by the sale of a call is equal to the premium received in selling the option. The covered call writer's position begins to suffer a loss if the stock price declines by an amount greater than the call premium received.
Source: Options Industry Council