LEAPS offer a way to participate in long-term stock appreciation without the full capital commitment of buying shares. These long-dated options behave more like stock than typical options, making them attractive for investors with a longer time horizon.
What Are LEAPS?
LEAPS stands for Long-Term Equity Anticipation Securities. These are simply options contracts with expiration dates more than one year in the future. LEAPS are available on many popular stocks and can extend up to three years.
Key Distinction: While LEAPS are technically just long-dated options, they behave differently due to their extended timeframe. Time decay is minimal in the early stages, and delta values for in-the-money LEAPS closely track stock movement.
LEAPS are available as both calls and puts. Call LEAPS are used for bullish positions, while put LEAPS can hedge portfolios or express bearish views over extended periods.
Why Use LEAPS?
Investors choose LEAPS for several strategic reasons.
Capital Efficiency
Instead of spending $20,000 to buy 100 shares of a $200 stock, you might buy a LEAPS call for $3,000 to $5,000. This frees up capital for diversification or other investments while maintaining exposure to the stock's movement.
Defined Risk
With LEAPS, your maximum loss is the premium paid. If the stock crashes 50%, your loss is limited to your LEAPS cost rather than losing half your investment in shares.
Leverage Without Margin
LEAPS provide leverage similar to buying stock on margin but without margin interest charges or margin call risk. You control 100 shares worth of upside potential for a fraction of the cost.
Time to Be Right
With one to three years until expiration, your investment thesis has time to play out. Short-term volatility matters less when you have years for the fundamentals to drive the stock price.
LEAPS as Stock Replacement
The most popular LEAPS strategy is using them as a stock replacement. Here is how it works.
Stock Replacement Example
Microsoft is trading at $400. You want exposure but do not want to invest $40,000 for 100 shares.
- Buy a LEAPS call with $320 strike (deep in the money), 18 months out
- The LEAPS costs $95 per share ($9,500 total)
- The delta is approximately 0.85, meaning the LEAPS gains $0.85 for every $1 MSFT rises
- Capital deployed: $9,500 vs $40,000 (76% less capital)
- If MSFT goes to $500, the LEAPS is worth approximately $180 (90% gain vs 25% for stock)
Understanding LEAPS Pricing
LEAPS pricing has unique characteristics compared to shorter-term options.
High Intrinsic Value
Deep in-the-money LEAPS have substantial intrinsic value. A LEAPS call with a $300 strike on a $400 stock has $100 of intrinsic value. The rest is time value.
Moderate Time Decay
Time decay (theta) on LEAPS is minimal because there is so much time remaining. A LEAPS might lose only a few cents per day, compared to dollars per day for weekly options.
Interest Rate Sensitivity
LEAPS are more sensitive to interest rate changes than short-term options. Higher interest rates increase call values and decrease put values over long periods.
Choosing the Right Strike Price
Strike selection significantly impacts LEAPS performance and risk profile.
Deep In-the-Money (ITM) LEAPS
Strikes 20-30% below current price have high deltas (0.80+) and behave most like stock. They have less leverage but more predictable behavior. Best for conservative stock replacement.
At-the-Money (ATM) LEAPS
Strikes near current price offer moderate leverage with deltas around 0.50-0.60. They cost less than ITM but need the stock to appreciate to profit at expiration.
Out-of-the-Money (OTM) LEAPS
Strikes above current price offer maximum leverage but higher risk. The stock must rise substantially before you profit. These are more speculative despite the long timeframe.
Recommendation: For stock replacement strategies, choose LEAPS with deltas of 0.70 or higher. This provides reliable correlation with stock movement while still offering leverage benefits.
LEAPS for Income: Poor Man's Covered Call
You can use LEAPS to create a covered call position without owning shares.
The strategy works like this:
- Buy a deep ITM LEAPS call (your "stock replacement")
- Sell short-term calls against it monthly
- Collect premium from selling calls while maintaining upside exposure
Poor Man's Covered Call Example
AAPL is trading at $180.
- Buy LEAPS $140 call expiring in 18 months for $48 ($4,800)
- Sell monthly $185 call for $3.00 ($300)
- If AAPL stays below $185, keep the $300 and sell another call next month
- Potential to collect $300-400 monthly (6-8% monthly return on capital)
- Capital required: $4,800 vs $18,000 for actual covered call
LEAPS Puts for Hedging
LEAPS puts can provide long-term portfolio protection.
Instead of buying puts monthly or quarterly, a single LEAPS put can hedge your portfolio for one to two years. This is often more cost-effective than rolling short-term puts repeatedly.
For example, buying a one-year SPY put 10% out of the money might cost 5% of your portfolio value but protects against major declines for the entire year.
Risks of LEAPS
Despite their appeal, LEAPS have important risks to consider.
Total Loss Risk
If the stock declines significantly and stays down, your LEAPS can expire worthless. Unlike shares, options have expiration dates.
No Dividends
LEAPS holders do not receive dividends. For high-dividend stocks, this can be a meaningful opportunity cost over multiple years.
Early Assignment (Short LEAPS)
If you sell LEAPS puts, you can be assigned early if the put goes deep in the money, especially around dividend dates.
Liquidity Concerns
LEAPS typically have wider bid-ask spreads than shorter-term options. This increases trading costs and can make exiting positions expensive.
Tax Considerations
LEAPS have different tax treatment than holding stock.
- Gains on LEAPS held over one year qualify for long-term capital gains rates
- If you exercise a LEAPS call, your holding period for the stock starts at exercise date, not when you bought the LEAPS
- Losses on LEAPS are capital losses subject to the same rules as stock losses
Consult a tax professional for advice specific to your situation.
Track Your LEAPS Positions
Pro Trader Dashboard helps you monitor LEAPS positions alongside your other holdings. Track time remaining, current values, and overall performance in one place.
Summary
LEAPS options offer a unique way to invest in stocks with defined risk and capital efficiency. They work best for investors with strong conviction in a stock's long-term prospects who want to deploy less capital than buying shares outright. The stock replacement strategy using deep ITM LEAPS is particularly popular. However, remember that LEAPS can still expire worthless if your thesis is wrong, and you miss out on dividends. Use LEAPS as part of a diversified strategy, not as a substitute for sound investment principles.
Explore other timeframes with our guides on weekly options and monthly options expiration.