LEAPS

LEAPS (Long-Term Equity Anticipation Securities) is an investment strategy whereby options contracts with expiration dates longer than one year, often extending up to three years. They function similarly to regular options but provide traders and investors with longer time horizons to capitalize on market trends.

LEAPS Features

• Extended Expiration: Unlike standard options, which typically expire within months, LEAPS allow for long-term speculation.
• Lower Capital Requirement: They offer exposure to stocks or indices without requiring full ownership, making them a cost-effective alternative to buying shares outright.
• Hedging & Leverage: Investors use LEAPS to hedge portfolios or leverage positions while managing risk.
• Time Decay Advantage: Since LEAPS have longer durations, they experience slower time decay compared to short-term options.

LEAPS Strategies

• Buying LEAPS Calls: Used to bet on long-term stock appreciation while minimizing upfront costs.
• Buying LEAPS Puts: Helps hedge against potential declines in a stock or index over time.
• Covered Call with LEAPS: Investors buy LEAPS calls and sell short-term calls against them to generate income. Sometimes called a “poor man’s covered call” because it mimics a traditional covered call but requires less capital.
  • How It works
    • Buy a LEAPS Call Option – Choose a deep in-the-money (ITM) LEAPS call with an expiration over a year away. This acts as a stock substitute.
    • Sell Short-Term Calls – Write near-term call options (typically 30-60 days out) against the LEAPS to collect premium income.
    • Repeat the Process – As the short-term calls expire, sell new ones to continue generating income.
  • Benefits
    • Lower Capital Requirement – Buying a LEAPS call is cheaper than purchasing 100 shares of stock.
    • Income Generation – Selling short-term calls provides regular premium income.
    • Limited Risk – The LEAPS call limits downside exposure compared to owning the stock outright.
  • Risks
    • LEAPS Decay – Over time, the LEAPS call loses value due to time decay.
    • Assignment Risk – If the short-term call is exercised, you may need to buy shares or close the LEAPS position.
    • Stock Price Movement – If the stock rises significantly, gains may be capped by the short-term call.

Worth Watching

Summary

The best part is their ability to provide long-term exposure to stocks or indices while requiring less capital than buying shares outright. If held for over a year, profits may qualify for long-term capital gains tax rates.