LEAPS strategy

LEAPS (Long-term Equity AnticiPation Securities) are options contracts with expiration dates one to three years in the future. They provide long-term directional exposure with defined risk , functioning similarly to owning stock but with significantly less capital required and no risk of losing more than the premium paid.

Bias: Bullish (calls) or Bearish (puts) Risk profile: Defined (premium paid) Ideal conditions: Long-term conviction, low IV rank, stock you'd otherwise buy and hold

Key characteristics

Low theta impact: With 1–3 years to expiry, daily theta decay is minimal relative to the option's total value. A LEAPS call worth $25.00 might lose only $0.02–0.05/day to theta , unlike short-dated options where decay is much more aggressive.

High vega sensitivity: LEAPS have the highest vega of any options. A change in IV significantly affects their value. This is why buying LEAPS when IV rank is low (cheap vega) is preferred , you benefit if IV later rises.

Capital efficiency: A deep ITM LEAPS call (delta 0.70–0.80) on a $200 stock might cost $35–$45 , controlling $20,000 of stock for $3,500–$4,500. Similar directional exposure at a fraction of the capital.

LEAPS as stock replacement

The most common LEAPS strategy: buy a deep ITM call (delta 0.70–0.85) as a substitute for owning 100 shares.

Setup example: AAPL is at $185. Instead of buying 100 shares ($18,500), you buy the $150 LEAPS call expiring in 18 months for $42.00 ($4,200 per contract).

• Delta ~0.80: moves like owning 80 shares
• Max loss: $4,200 (vs $18,500 for shares)
• No margin risk
• Retains most upside participation

Poor man's covered call

Combine a LEAPS call (long) with a short near-term OTM call to generate income against the long LEAPS , a diagonal spread. Each month, collect premium from the short call, reducing your LEAPS cost basis over time.

This "poor man's covered call" replicates a covered call strategy without the capital requirement of owning 100 shares.

When to use LEAPS

• Long-term bullish conviction on a specific stock or sector
• Want defined-risk exposure without owning shares
• IV rank is low , LEAPS vega makes them more expensive in high-IV environments
• Prefer capital efficiency over full share ownership

Related terms: Diagonal spread, delta, Vega, theta, stock replacement, poor man's covered call

Try it on Stryke: Screen for low IV rank stocks suitable for LEAPS in the Options Screener.

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