Low Exercise Price Option (LEPO)
Candlefocus EditorThe buyer of a LEPO option operates on a margin. This means that the buyer may be able to purchase the option with a smaller initial investment than would be required of purchasing the underlying stock. A seller of a LEPO, however, is required to carry a larger amount of margin on their position due to the potential of greater losses.
A characteristic of the LEPO that further distinguishes it from a futures contract is its expiration date. After a LEPO contract is created, it has a finite expiration date, usually around a month. This contrasts with a futures contract, which typically has no conclusion and must be opened, closed and managed by the trader.
Unlike U.S. exchanges, which offer a variety of options that cover both easy and hard exercise prices, LEPO options are not offered on any American exchanges. As such, LEPO options are traded in the over-the-counter market, and traders must carefully vet counterparties and choose among the existing trading platforms.
In summary, a low exercise price option (LEPO) is a type of European-style call option created at an ultra low exercise price of one cent. This unique design allows for a short expiration date normally uncustomary with futures contracts, making it a suitable option for day traders. Furthermore, LEPO options allow the buyer to leverage a smaller amount of capital than normal. Although uncommon in the U.S., a significant number of night markets and over-the-counter platforms have sprung up to offer this alternative.