OPTIONS

HoughtonAndAtkeson answered one year ago …

This question has a number of different answers, so we'll give you some things to consider and you can apply the facts to your situation to help you decide.

First, with a Long-Term Equity AnticiPation Security, or a LEAP option, you are more likely get the benefit of long-term capital gains taxation of 15% versus approximately 35% taxation for short-term (4-6 month) gains.

However, LEAP options are typically more expensive, so you should consider how much capital you want to allocate for the long term.

You also need to consider your fundamental outlook for the underlying stock. Assuming we are talking about call options, if you think the stock will stay solid in the long-term, the LEAP option may be the better way to go. Of course, conversely, if your outlook for the stock is poor, you would be using put options.

However, if you are playing binary events, such as possible mergers or new products, the shorter-term options might suit your outlook better.

With the shorter-term options, you also have to be prepared that each time you repurchase the options after taking profit, you may be paying a higher price, so your potential gains could decrease each round.

Perhaps a more lucrative way to go is to buy a larger number of contracts and sell part of your holdings throughout the year as the option's value increases. This allows you to take profit off of the table while keeping some contracts in play for future gains.