Some evidence in the trading and pricing of equity LEAPS

This paper documents some evidence in the trading and pricing of equity Long-term Equity AnticiPation Securities (LEAPS). The main findings on trading are that LEAPS open interest, trading volume, and put/call ratio are seasonal on a yearly basis possibly due to the impact of the “melding” process that is unique to equity LEAPS. This paper also finds that the Black–Scholes Option Pricing Model, in general, overprices or underprices out-of-the-money (OTM) or in-the-money (ITM) equity LEAPS calls, respectively, and the model tends to overprice when the options are very deep in-the-money (VDITM). Furthermore, the evidence indicates that the deviations of the Black–Scholes prices from the observed option market prices are more pronounced in equity LEAPS than in standard options, suggesting that the Black–Scholes Option Pricing Model is less well suited to the pricing of equity LEAPS than to the pricing of standard options.