LEAPS Options Trading Guide

What are LEAPS Options?

LEAPS (Long-term Equity AnticiPation Securities) are simply options with expiration dates more than one year in the future, extending up to three years. While standard options typically expire within weeks or months, LEAPS give you time—lots of it.

Think of LEAPS as the marathon runners of the options world. Where weekly options sprint toward expiration, burning time value rapidly, LEAPS move at a measured pace. This fundamental difference opens up entirely new trading strategies and investment approaches unavailable with short-term options.

Key distinction: An option becomes a LEAP when it has more than 9 months until expiration. Once it crosses under 9 months, it's technically just a long-dated option. Most LEAPS are issued with January expirations 1-3 years out.

Why Trade LEAPS Instead of Buying Stock?

LEAPS offer several compelling advantages over stock ownership:

1. Massive Capital Efficiency

This is the big one. LEAPS allow you to control 100 shares with a fraction of the capital required to buy the stock outright.

Example: Apple trading at $180
- Buying 100 shares: $18,000 required
- Buying 1 LEAP (2-year, 80 delta): ~$4,500
- Capital saved: $13,500 (75% less)

That $13,500 difference can be invested elsewhere, used as dry powder for opportunities, or simply reduce your overall market exposure while maintaining similar upside potential.

2. Defined Maximum Risk

With stock, your risk is the full purchase price minus zero (bankruptcy). With LEAPS, your maximum loss is the premium paid—nothing more. If you paid $4,500 for the LEAP, that's your maximum loss even if Apple drops to $1.

3. Leverage Without Margin

LEAPS provide leverage similar to buying on margin, but without margin calls, overnight interest charges, or forced liquidations. Your risk is defined upfront—the premium paid.

4. Tax Advantages (Sometimes)

LEAPS held for 12+ months qualify for long-term capital gains treatment (consult your tax advisor). Additionally, if a stock pays dividends but you hold a LEAP instead, you avoid dividend taxes and the dividend withholding complications for international investors.

The Poor Man's Covered Call Strategy

This is the most popular LEAPS strategy and for good reason—it replicates a covered call with 75% less capital.

Traditional Covered Call Review

- Buy 100 shares: $18,000 (using AAPL example)
- Sell monthly OTM call: Collect $200-300 premium
- Result: Generate 1-2% monthly income, cap upside at call strike

Poor Man's Covered Call Setup

Instead of buying 100 shares for $18,000:

1. Buy a deep ITM LEAP (70-80 delta, 1-2 years out): Cost ~$4,500
2. Sell a near-term OTM call (30-45 days, 30-40 delta): Collect $200-300
3. Manage monthly: Let short call expire, sell next month's call

Capital required: $4,500 vs $18,000—saving $13,500 (75% less)

Poor Man's Covered Call Example

Setup: AAPL at $180

• Buy Jan 2027 $140 LEAP call (80 delta): $4,500
• Sell Feb 2025 $190 call (35 delta): Collect $250

If AAPL stays flat:
- Short call expires worthless, keep $250
- Sell March $190 call for $250
- Monthly income: 5.5% return on $4,500 capital (vs 1.4% on $18,000 in stock)

If AAPL rallies to $195:
- Short call assigned, you're short 100 shares at $190
- Exercise your LEAP at $140
- Profit: $50 on stock + $250 premium = $5,250 gain on $4,500 capital (116% ROI)

LEAPS vs Stock Ownership: The Tradeoffs

LEAPS aren't always better than stock. Here's an honest comparison:

When LEAPS Are Better

• Limited capital: Can't afford 100 shares
• Short-to-medium term view: 1-2 year outlook
• Income generation focus: Using Poor Man's Covered Call
• Defined risk preference: Want max loss capped
• Multiple positions desired: Spread capital across 3-4 names vs 1

When Stock Is Better

• Dividend income important: LEAPS don't receive dividends
• Very long-term hold: 5+ years (rolling LEAPS gets expensive)
• Voting rights matter: LEAPS don't have shareholder rights
• Emotional comfort: Stock ownership feels more stable psychologically
• Estate planning: Stock receives step-up basis at death, LEAPS don't

The Theta Cost of LEAPS

LEAPS still decay, just slowly. A 2-year LEAP might lose $1-2 per week in time value. This is the "rent" you pay for leverage. Over 2 years, you might pay $2,000-3,000 in total theta decay.

Compare this to margin interest: Borrowing $13,500 at 8% = $1,080/year or $2,160 over 2 years. LEAPS and margin have similar costs, but LEAPS have defined risk without margin calls.

How to Buy LEAPS: Selection Criteria

Not all LEAPS are created equal. Here's how to choose:

1. Delta Selection

For stock replacement: Buy 70-80 delta LEAPS (deep ITM). These track the stock closely (every $1 stock move = $0.70-0.80 option move).

For leveraged speculation: Buy 50-60 delta LEAPS (ATM). More leverage, more risk, higher potential returns.

2. Time Selection

Minimum time: 12-18 months. Any shorter and theta accelerates too quickly.
Optimal time: 18-24 months. Best theta/dollar tradeoff.
Maximum time: 36 months. More expensive, theta slower, but less liquidity.

3. Check Liquidity

LEAPS can have wide bid-ask spreads. Rules of thumb:

• Open interest > 100 contracts
• Bid-ask spread < 5% of mid price
• Daily volume ideally > 20 contracts

Stick to liquid underlyings: SPY, QQQ, AAPL, MSFT, TSLA. Avoid LEAPS on low-volume stocks.

Managing LEAPS Positions

When to Roll Your LEAP

As your LEAP approaches 6-9 months to expiration, theta accelerates. Consider rolling:

Rolling process:

1. Close your current LEAP (sell it)
2. Buy a new LEAP 12-18 months out at similar delta
3. Net cost: Usually $500-1,500 depending on stock movement

When NOT to roll: If the stock is down significantly and your LEAP has lost 50%+ value, consider taking the loss rather than throwing good money after bad.

Adjusting for Stock Moves

Stock rallies hard: Your LEAP goes deeper ITM (delta approaches 100). It's now behaving almost exactly like stock. Consider taking profits or rolling to higher strikes to maintain leverage.

Stock drops hard: Your LEAP loses delta (maybe now 40-50 delta). You have three choices:
1. Hold and hope for recovery
2. Roll down in strike to reduce cost basis
3. Cut losses and exit

Common LEAPS Mistakes

Key Takeaways