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Sunday, September 23, 2007

Why Buy LEAPS TO Hold, Not To Trade

Buy LEAPS To Hold, Not To Trade
One unfortunate aspect of LEAPS is due to the fact that not many people know about them, or trade them. Consequently, trading volume is much lower than for short-term options. This means that most of the time, there is a big gap between the bid and asked price. (This is not true for QQQQ LEAPS, and is one of the reasons I particularly like to trade in the Nasdaq 100 tracing equity.)
The person on the other end of your trade is usually a professional market maker rather than an ordinary investor buying or selling the LEAP. These professionals are entitled to make a profit for their service of providing a liquid market for inactively traded financial instruments such as LEAPS. And they do. They manage to sell at the asked price most of the time, and to buy at the bid price. Of course, you are not getting the great prices the market maker enjoys.
So when you buy a LEAP, plan on holding it for a long time, probably until expiration. While you can always sell your LEAP at any time, it is expensive because of the big gap between the bid and asked price.

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