Low Exercise Price Option (LEPO)

What Is a Low Exercise Price Option (LEPO)?

A low exercise price option (LEPO) is an European-style call option with an exercise price of one penny. Both buyer and seller operate on margin and, on the grounds that it is very nearly a certainty that the holder will exercise the option at maturity, it is fairly like a futures contract.

Understanding a Low Exercise Price Option (LEPO)

LEPOs originated in Switzerland and immediately spread to Finland for the avoidance of paying the required stamp duties that were charged on stock trading. Since the strike price is so close to zero, the investor purchasing the LEPO gains a large portion of the highlights of possessing the share directly with the major exemptions of dividends and voting rights.

The Australian Stock Exchange (ASX) started listing LEPO options in 1995 and, as of July 2021, offers them on almost 100 ASX-recorded companies.

LEPOs versus Normal Options

LEPOs vary from customary or standard options in more than one way.

LEPOs are just available as call options.
They are just available with European style expirations.
They are so deep in the money (ITM) that they trade in much the same way to the underlying stock itself.
Buyers purchase them on margin, so they don't pay the full amount of the premium upfront.
The two buyers and sellers will have progressing margin payments.
Holders don't receive dividends or have voting rights until after exercise.

Theoretically, LEPOs additionally act as forward contracts or futures. Standard options give the holder the right yet not the obligation to purchase the underlying security at or before expiration. Notwithstanding, since the strike price is so low, the chances that the option will lapse ITM, and in this manner automatically exercise, at the expiration date are a close to certainty. Basically, a LEPO is a futures contract with the obligation to take delivery.

Of course, all options and futures might be sold to close out the position and abstain from taking delivery of the underlying.

Advantages and Disadvantages of Low Exercise Price Options (LEPOs)

Since LEPOs are basically a deep ITM call option, they have an extremely high delta value and trade in much the same way to the underlying stock. Since these options are of the European style, meaning they are simply able to be exercised at expiration, their close to zero strike price nearly guarantees that the holder will take delivery of shares around then. The advantage over possessing the stock outright is the participation in the performance of the underlying with practically no financial or legal issues brought about by the direct holding of the stock.

Deep ITM options have exceptionally high premiums, or initial costs. Nonetheless, the investor holds LEPOs on margin, bringing about a lower upfront cost. Once more, the benefits must be weighed against the disadvantages of having no claim on dividends or the ability to vote the shares.

Highlights

LEPOs function as deep-in-the-money options like the actual stock.
LEPO options are not available on any U.S. exchanges.
A low exercise price option (LEPO) is an European-style call option with an exercise price of one penny that copies a futures contract.
Both buyer and seller of a LEPO operate on margin.