LEAPS (Long-Term Options)

What is a LEAPS Strategy?

LEAPS stands for Long-Term Equity Anticipation Securities. These are simply options with expiration dates more than one year away. A LEAPS strategy typically means buying deep in-the-money call options as a substitute for owning the stock outright. Instead of paying $10,000 for 100 shares of a $100 stock, you might spend $2,500 on a deep ITM LEAPS call and control the same 100 shares.

The key advantage is capital efficiency. You get similar upside exposure to the stock while tying up far less capital. The tradeoff is that LEAPS still have an expiration date, and you pay a time premium that erodes over the life of the option.

How to Set It Up

Buy 1 deep ITM call with at least 12-18 months until expiration
Strike selection: Go deep in the money, typically 70-80 delta or higher. A strike 15-20% below the current stock price is a common choice. The deeper ITM, the more the option behaves like stock.
Expiration: At least 1 year out. 18-24 months is even better because time decay is minimal that far out.
Delta target: Look for 0.70-0.85 delta. This means your LEAPS will move roughly 70-85 cents for every $1 move in the stock.

The cost of the LEAPS is your total risk. You cannot lose more than the premium paid.

When to Use This Strategy

Use LEAPS when:

You are long-term bullish on a stock but want to use less capital
You want to free up cash for other investments or trades
You want leveraged exposure with defined risk
The stock is expensive and buying 100 shares is not practical
You want to use the LEAPS as the long leg of a poor man's covered call

LEAPS work best on high-quality stocks you have conviction in. They are not ideal for speculative plays because the time premium is expensive and you need the stock to move enough to cover that cost.

Example Trade

Stock XYZ is trading at $100. You are bullish over the next 18 months.

Buy 1 XYZ $80 call expiring in 18 months for $25.00
Cost: $25.00 x 100 = $2,500 (versus $10,000 to buy 100 shares)
Intrinsic value: $20 ($100 - $80 strike)
Time value: $5 ($25 - $20 intrinsic)
Delta: ~0.80

Scenario 1: XYZ goes to $120 in 12 months. Your call is now worth roughly $42 (with some time value remaining). Profit: ($42 - $25) x 100 = $1,700 on a $2,500 investment. That is a 68% return, compared to 20% if you had bought the stock.

Scenario 2: XYZ stays at $100. Your call still has intrinsic value of $20, but you lost the $5 time premium. Loss: roughly $500 depending on remaining time value.

Scenario 3: XYZ drops to $75. Your call is now near worthless or worth very little. You could lose most of the $2,500, but that is still less than the $2,500 loss on 100 shares.

Risk and Reward

Max profit: Unlimited. Just like owning stock, if it keeps going up, your LEAPS keeps gaining.
Max loss: The premium paid. $2,500 in our example. This is less than the max loss on 100 shares, which could be the full $10,000.
Breakeven at expiration: Strike + premium. $80 + $25 = $105. The stock needs to be above $105 at expiration for the trade to be profitable if held to expiry.

The leverage works both ways. You get amplified percentage returns on the upside but can lose 100% of your investment if the stock drops significantly.

Tips and Common Mistakes

Go deep ITM. Cheap OTM LEAPS have a high probability of expiring worthless. Deep ITM LEAPS behave more like stock.
Do not let the LEAPS expire. Roll to a new expiration 60-90 days before the current one expires. Time decay accelerates in the final months.
Use LEAPS as the foundation for a poor man's covered call. Sell short-term OTM calls against your LEAPS to reduce your cost basis.
Watch for dividends. LEAPS holders do not receive dividends. If the stock pays significant dividends, factor that into your comparison with stock ownership.

Related Strategies

Long Call — a shorter-term version of the same bullish bet
Poor Man's Covered Call — use LEAPS as collateral to sell short-term calls
Bull Call Spread — a defined-risk bullish alternative with lower cost