If you want to use options for long-term investing instead of short-term trading, LEAPS might be exactly what you need. LEAPS allow you to control shares of stock for months or even years, giving you time for your investment thesis to play out. In this guide, we will explain everything you need to know about LEAPS options.
What Are LEAPS Options?
LEAPS stands for Long-Term Equity Anticipation Securities. These are simply options contracts with expiration dates that are more than one year away. While regular options might expire in days or weeks, LEAPS can have expirations up to three years in the future.
Key point: LEAPS are not a special type of option. They are regular calls and puts that happen to have long expiration dates. They work exactly the same way as shorter-term options.
Why Traders Use LEAPS
LEAPS offer several advantages over buying stock outright or trading short-term options:
1. Leverage Without the Urgency
With LEAPS, you can control 100 shares of stock for a fraction of the cost. Unlike short-term options, you have plenty of time for your investment to work out. You are not racing against the clock.
2. Lower Capital Requirements
Buying 100 shares of a $200 stock costs $20,000. A LEAPS call option on the same stock might cost $2,000 to $4,000, depending on the strike price and time to expiration.
3. Defined Risk
When you buy a LEAPS call or put, your maximum loss is limited to the premium you paid. You cannot lose more than your initial investment, even if the stock moves dramatically against you.
Example: LEAPS vs Buying Stock
Apple (AAPL) is trading at $180. You are bullish for the next two years.
- Buying stock: 100 shares costs $18,000
- Buying LEAPS: A January 2028 $180 call might cost $3,500
If AAPL rises to $220 by expiration:
- Stock profit: $4,000 (22% return on $18,000)
- LEAPS profit: $4,000 - $3,500 = $500 intrinsic, but the option would be worth about $4,000 (114% return)
LEAPS Call Options
A LEAPS call gives you the right to buy 100 shares at the strike price before expiration. This is the most popular way to use LEAPS because it lets you profit from a stock going up without buying the shares outright.
Best Practices for LEAPS Calls
- Choose deep in-the-money strikes: ITM LEAPS have higher deltas, meaning they move more like the stock. A delta of 0.70 to 0.80 is ideal.
- Buy at least 18 months out: The longer the expiration, the less time decay hurts you on a daily basis.
- Consider the break-even: Your break-even is the strike price plus the premium paid. Make sure you believe the stock can reach that level.
LEAPS Put Options
LEAPS puts give you the right to sell 100 shares at the strike price. Traders use these for long-term bearish bets or as portfolio protection.
Using LEAPS Puts for Protection
If you own stock and want to protect against a crash, buying a LEAPS put acts like insurance. You pay the premium upfront, and if the stock falls below your strike, you can sell at the higher price.
Example: Portfolio Protection
You own 100 shares of SPY at $500. You want protection for 18 months.
- Buy a July 2027 $450 put for $15.00 ($1,500 total)
- If SPY crashes to $400, your put is worth $50 ($5,000)
- Your stock lost $10,000, but your put gained $3,500
- Net loss reduced from $10,000 to $6,500
LEAPS Strategies
1. Poor Man's Covered Call
Instead of buying 100 shares and selling calls against them, you buy a deep ITM LEAPS call and sell short-term calls against it. This requires much less capital than a traditional covered call.
2. LEAPS Diagonal Spread
Buy a long-dated LEAPS option and sell a shorter-dated option at a different strike. This lets you collect premium while maintaining long-term exposure.
3. Stock Replacement
Replace stock positions with deep ITM LEAPS calls. This frees up capital and limits your downside risk to the premium paid.
Risks of Trading LEAPS
LEAPS are not without risks. Here is what you need to watch out for:
- Time decay: While slower than short-term options, LEAPS still lose value as time passes. The last few months see accelerated decay.
- Higher premiums: LEAPS cost more than short-term options because you are buying more time.
- Opportunity cost: Money tied up in LEAPS cannot be used elsewhere.
- No dividends: LEAPS holders do not receive dividends like stockholders do.
- Total loss possible: If the stock does not reach your break-even by expiration, you can lose your entire investment.
How to Choose LEAPS Strike Prices
The strike price you choose depends on your goals:
- Deep ITM (delta 0.70-0.80): Best for stock replacement. Moves almost like the stock with less capital.
- ATM (delta around 0.50): Balanced risk and reward. Lower cost but more risk of total loss.
- OTM (delta below 0.40): Cheapest option but highest risk. The stock needs to move significantly for profit.
Pro tip: For most LEAPS strategies, sticking with deep ITM calls (delta 0.70 or higher) gives you the most stock-like behavior while limiting your downside.
When to Roll Your LEAPS
As your LEAPS approaches expiration, time decay accelerates. Many traders roll their LEAPS when there are 3-6 months remaining. Rolling means selling your current LEAPS and buying a new one with a later expiration.
Rolling Guidelines
- Monitor your LEAPS when it has 6 months or less until expiration
- If you are still bullish, roll to a new LEAPS with 18+ months remaining
- Consider adjusting your strike based on current stock price
- Factor in the cost of rolling (you will pay a debit to extend)
LEAPS vs Regular Options
Here is a quick comparison to help you decide which is right for you:
- Time horizon: LEAPS for 1-3 years, regular options for days to months
- Time decay impact: LEAPS decay slowly at first, regular options decay quickly
- Premium cost: LEAPS cost more upfront, regular options are cheaper
- Trading style: LEAPS for investing, regular options for trading
Track Your LEAPS Positions
Pro Trader Dashboard helps you monitor your LEAPS options alongside your stock positions. Track your cost basis, current value, and time until expiration all in one place.
Summary
LEAPS options are powerful tools for long-term investors who want the leverage of options without the pressure of short-term expiration dates. They work best when you have a strong conviction about a stock's direction over the next one to three years. Start with deep ITM strikes for stock replacement strategies, and remember to roll your positions before time decay accelerates.
Ready to learn more about options? Check out our guide on options Greeks or learn about theta decay to understand how time affects your options.