What are LEAPS options?

A LEAPS is a call or a put like any other: one contract usually covers 100 shares, equity LEAPS can be exercised on any business day (American style), and strikes, premiums and Greeks work the same way. What differs is time. Cboe’s specifications list equity LEAPS with January expirations only, on the third Friday, up to 39 months after a series is first listed; in practice the furthest one sits roughly two to three years away. Many brokers loosely call any option with more than a year left a LEAPS.

Nothing converts. As the calendar moves, a LEAPS simply has less time left, and once it is under a year from expiration it behaves like the standard options on the left of the timeline at the top of this page. Your broker’s option chain shows which long-dated months exist; many smaller stocks have none. New to options? Start with options trading for beginners and options expiration.

LEAPS
Long-Term Equity AnticiPation Securities: listed options with more than a year to expiration. Cboe lists equity LEAPS with January expirations up to about three years out.
Deep in the money
An option whose strike is far on the profitable side of the stock price, such as a $70 call on a $100 stock. Its delta is close to 1 and most of its premium is intrinsic value.
Time value
The part of the premium above intrinsic value. It is what the buyer pays for time and possible movement, and it falls to zero by expiration.

Do LEAPS have less time decay?

Per day, yes. Time decay, the theta in the options Greeks, speeds up as expiration nears, so an option with 18 months left loses value slowly at first. The price is a bigger premium, and slow is not zero: a LEAPS still loses all its time value by expiration, fastest in the final months, so many holders sell or roll well before then.

Same hypothetical stock at $100, a $100 strike, IV 30%, stock unchanged:

  • 30-day call: about $3.59, losing about $0.06 a day, roughly 1.7% of its value. Over the next 30 days it loses all $3.59.
  • 18-month call: about $17.12, almost five times the price, losing about $0.02 a day, roughly 0.1% of its value. Over the next 30 days it loses about $0.54, about 3%.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn decay panels, each scaled to its own premium, stock unchanged. Left: a 30-day call at $3.59 falls to zero over 30 days, losing about $0.06 a day; the whole area is shaded and labeled next 30 days, stock unchanged: −$3.59 (100%). Right: an 18-month call at $17.12 declines slowly, then faster near expiration, losing about $0.02 a day; only a thin slice at the start is shaded: −$0.54 (≈3%). A footnote reads stock at the strike, same IV: hypothetical model values.

Deep in-the-money LEAPS calls as a stock substitute

Some investors who want stock exposure with less cash buy a deep in-the-money LEAPS call instead of shares. Its high delta makes it move close to dollar for dollar with the stock, and most of its premium is intrinsic value. Hypothetical, stock at $100:

  • 100 shares cost $10,000.
  • One $70 call with 18 months left costs about $35.88, or $3,588: $30 of intrinsic value plus $5.88 of time value ($588). Its delta of about 0.91 behaves like roughly 91 shares.
  • If the stock jumps to $110 at once, the shares gain $1,000 (+10%) and the call about $927 (+26%). If it drops to $90, the shares lose $1,000 (−10%) and the call about $880 (−25%).
  • At expiration the call breaks even at $105.88 ($70 + $35.88). Below $70 it expires worthless and the whole $3,588 is gone, while shares at $70 would still be worth $7,000.

Turn your phone sideways to read the drawing. Tap to close.

Hand-drawn paired bars comparing 100 shares at $100 (grey) with 1 LEAPS call, strike $70, 18 months, delta 0.91 (green). Cash needed: $10,000 vs $3,588. Exposure, in shares: 100 vs ≈91. Time value paid: $0 vs $588. A red note reads below $70 at expiration, the call loses all $3,588.

What is a poor man’s covered call?

A poor man’s covered call replaces the 100 shares of a covered call with a deep in-the-money LEAPS call, then sells shorter-dated out-of-the-money calls against it. Hypothetical: own the $70 LEAPS call at $35.88 and sell a 45-day $110 call for about $1.19. Different strikes and expirations make it a diagonal spread, a cousin of the calendar spread. The short call caps gains above $110 until it expires, its small premium cushions little if the stock falls, and it can be assigned early. Many traders check that the LEAPS strike plus the net debit stays under the short strike: $70 + $34.69 = $104.69, below $110.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn chart with strike on the vertical axis and expiration on the horizontal axis. A red dot near the start at $110 marks sell $110 call, 45 days, +$1.19, with two dashed red circles to its right labeled sell again later; a green dot at the far right at $70 marks buy $70 LEAPS call, 18 months, −$35.88. A dashed diagonal line joins them, labeled diagonal: different strikes and expirations, and a dashed line marks the stock at $100. A yellow note reads gains above $110 are capped until the short call expires.

What are the risks of LEAPS options?

LEAPS soften one risk, fast daily decay, and keep or magnify the others:

  • Implied volatility: long-dated options carry more vega. In our model, a drop in IV from 30% to 25% takes the at-the-money 18-month call from $17.12 to about $14.83 (−13%) with the stock unchanged; the deep in-the-money $70 call loses only about $0.89 (−2.5%). See implied volatility.
  • Liquidity: long-dated strikes trade less, so the bid-ask spread is often wider; a $0.80 spread on a $36 option costs about 2% to get in and out. Use limit orders.
  • Leverage: a 10% fall in the stock cost the call about 25% in our example, and a stock that ends below the strike takes the whole premium.
  • Dividends: option prices already reflect expected dividends, but the call holder receives none.

How to choose a LEAPS contract

The same steps as for any option, with a longer lens; the strike price guide covers the basics. For swings of days to weeks, shorter contracts are usually the tool; see swing trading options.

  1. Start from the plan: the thesis, the time it needs and the price that would prove it wrong.
  2. Expiration: buy more time than the thesis needs, so you can exit before the fastest decay.
  3. Strike: for stock-like exposure, a deep in-the-money call (delta around 0.80 or higher) keeps time value small; an at-the-money LEAPS costs less but carries more time value and more vega.
  4. Liquidity: check the spread, volume and open interest on that exact contract.
  5. Size: decide the most you can lose, then count contracts, never the other way round; see risk management.