They are generally used during catalyst events for the underlying stock’s price, such as an earnings announcement or a major news development. They are generally underpriced because it is difficult to estimate the performance of a stock far out in the future. They are more expensive compared to short-term options. The main component of risk in holding LEAPs is an inaccurate assessment of a stock’s future value. The main component of holding long-term options is the use of leverage, which can magnify losses, to conduct the trade.
The main risk component in holding short-term options is the short duration. Time value decay is minimal for a relatively long period because the expiration date is a long time away. Time value does not decay as rapidly for long-term options because they have a longer duration. Time value and extrinsic value of short-term options decay rapidly due to their short durations.
