Ask TheStreet: Shareholder Suits

Investors also buy options when they think a stock or other security is going to decline in value. An option to sell a stock is called a put. When you buy put options, you buy the right the sell the underlying investment at a set strike price within a given time frame. The way buying put options works is similar to buying calls, except you hope for the underlying investment to go down. If so, you trade for a profit. If not, you swallow the premium.

Selling options works differently. Since the buyer is the one holding the cards, you are obligated to sell if the buyer wants to exercise the options. Investors can sell options to buy and options to sell: If you sell someone the right to buy an underlying investment from you, it is known as writing a call. If you sell someone the right to sell an underlying investment to you, that's called writing a put.

OK. Now that we have the basics down, let's skip ahead to LEAPS.

One of the advantages of LEAPS is that, because of their long-term expirations, the at-the-money strikes closely track the price of the underlying shares of stock. This can make LEAPS a great alternative for an investor who expects significant long-term growth in an underlying stock but who doesn't want to make the substantial capital outlay required for entering a long-term position in the stock.

Remember, each LEAPS contract, like standard equity options, represents 100 shares of the underlying security, providing tremendous leverage.

There is, however, a potential drawback to buying LEAPS instead of stock: LEAPS don't pay dividends. As more companies move toward paying dividends and as favorable tax rulings are phased in, this may be an important consideration for investors hoping for a steady yield from their portfolio.