A Long-dated option contract is a standardised derivative contract that enables the buyer (holder or owner) of the instrument the right to buy or sell the underlying asset at a predetermined price and quantity on a specified date in the future.
- Underlying: The underlying asset can be stocks, indices, currencies, precious metals etc.
- Duration: The duration to expiry of these contracts is of more than 1 year and up to 3 years.
- Exchange traded contracts: These are publicly traded options contracts on Exchanges.
- Strike price:The predetermined price at which the contract can be exercised is known as the strike price.
- Premium: Premium is the amount paid by the option buyer to the option seller.
- Lot size: The predetermined quantity is known as the lot size. Contracts can only be traded in multiples of this number.
- Right: The right to buy (for call options) or sell (for put options) resides with the option buyer. He/she may choose to use it or not.
- Obligation: The obligation to sell (for call options) or to buy (for put options) resides with the option seller. So the option seller has to follow through if the option buyer chooses to exercise his/her option.
Pros of trading in Long-dated options
- Risk Mitigation: It allows traders to mitigate the risk involved by holding the contracts for a longer period.
- Diversification opportunity: Long dated options can be used to diversify one's portfolio.
- Time to expiry: Time to expiry is more so the option buyer has ample time to exercise his right when the conditions are favourable.
Significance in India
In India, long-dated options are known as LEAPS which stand for Long-Term Equity Anticipation Securities. These are publicly traded options contracts with the duration to expiry of more than 1 year and up to 3 years. However, it is only available on the Nifty50 Index and their liquidity is not as high as the short-term contracts.
Unlike in India Leaps are highly traded derivatives on US Exchanges with the minimum duration of 1 year and its multiples. They are available on both stocks and indices.
Types of Long-dated options available:
- Call option: A call option allows the option buyer to benefit from an up move in the underlying as it gives the option buyer the right to buy the underlying asset at a predetermined price.
- Put option: A put option allows the option buyer to benefit from a down move in the underlying as it gives the option buyer the right to sell the underlying asset at a predetermined price.