LEAPs¶
Long-Term Equity Anticipation Securities - options with expiration dates more than one year out.
Resources¶
Stock Replacement Strategy with LEAPs¶
The Stock Replacement Strategy involves buying a high-delta, deep in-the-money (ITM) call LEAP instead of 100 shares of stock. Since the call is deep ITM and implied volatility is reasonable, you'll pay minimal time premium—potentially even less if there's a dividend.
Advantages¶
| Advantage | Description |
|---|---|
| Minimal Time Decay | LEAPs experience very little theta for many months, resulting in low daily cost of ownership |
| Reduced Catastrophic Risk | At expiration, a call LEAP has less risk than shares. If price drops below stock price minus LEAP cost, the shareholder keeps losing, while call owner cannot lose more than initial cost |
| Lower Pre-Expiration Risk | LEAPs may lose less than stocks due to decreasing delta as price drops |
| Rolling Up | If underlying rises, you can roll your call up, taking cash off the table and reducing risk |
Disadvantages¶
| Disadvantage | Description |
|---|---|
| Time Premium | Some time premium is paid, even with deep ITM LEAPs |
| Bid/Ask Spread | LEAPs often have wide bid/ask spreads, making adjustments costly |
| Dividends | Share owners receive dividends; call LEAP holders do not |
| Cost After Drop | If underlying drops significantly, IV may rise, making new LEAPs more expensive |
Rolling Strategy
If you still like the stock's upside, consider rolling your LEAPs before they become traditional options, to avoid accelerating theta decay.
Poor Man's Covered Call (PMCC)¶
Income Strategy
If you've mastered the stock replacement strategy, the next step is the Poor Man's Covered Call: use the LEAP as a stock surrogate and write out-of-the-money (OTM) calls against it.
Technically, this is a diagonal spread.