LEAPS (Long-Term Options)

What Are LEAPS?

LEAPS (Long-Term Equity Anticipation Securities) are options contracts with expiration dates extending beyond one year, up to approximately 39 months. They function identically to standard options in all other respects: 100 shares per contract, American-style exercise for equity LEAPS, and standardized strike prices.

LEAPS are issued once per year, typically in September, with expiration dates in January two and three years out. As time passes and a LEAPS contract reaches less than one year to expiration, it becomes a standard option.

Why LEAPS Matter

LEAPS fill the gap between short-term options trading and long-term stock ownership, offering unique advantages:

• Capital efficiency: LEAPS allow you to control shares at a fraction of the cost of buying them outright. A deep ITM LEAPS call might cost 15% of the stock price while capturing 80-90% of its moves
• Defined risk: Unlike stock (which can theoretically lose 100% of its value), the maximum loss on a LEAPS position is known upfront and limited to the premium paid
• Leveraged long-term exposure: For investors who want to participate in a multi-year thesis without committing full capital, LEAPS provide leveraged exposure with a defined risk profile
• Reduced time decay: LEAPS lose time value much more slowly than short-dated options. An ATM LEAPS with 18 months to expiration might lose $0.02/day in theta versus $0.15/day for a 30-day option

LEAPS Strategies

Common LEAPS applications include:

• Stock replacement: Buy a deep ITM LEAPS call (0.80+ delta) instead of stock. Captures most of the upside with a fraction of the capital
• Poor man's covered call: Buy a deep ITM LEAPS call and sell short-dated calls against it. Creates a covered call-like position without owning shares
• Long-term hedging: Buy LEAPS puts to protect a portfolio over an extended period. More cost-effective per day of protection than rolling monthly puts
• Bullish leverage: Buy ATM or slightly OTM LEAPS calls to express a strong 1-2 year thesis with defined risk

The key LEAPS metric to monitor is the intrinsic-to-total-premium ratio. For stock replacement, you want LEAPS where intrinsic value is 70%+ of total premium, ensuring most of your capital is in stock-equivalent exposure rather than time value at risk of decay.