Buying LEAPS Options
LEAPS (Long-Term Equity Anticipation Securities) are long-dated options (buying calls) that allow traders to gain extended exposure to an underlying asset with reduced capital outlay and defined risk. The same applies to long-dated puts, used for bearish views, although profit potential is limited in that case.
LEAPS Call Strategy
Custom payoff diagram of a LEAPS call strategy
Imagine Stock XYZ is trading at $50 and you expect it to rise significantly over the next two years. Instead of purchasing 100 shares for $5,000, you could buy a LEAPS call option (2-year expiration, $50 strike) for $8 per share. Your total cost would be $800. To break even at expiration, the stock must reach at least $58. If it climbs to $70, the option's intrinsic value would be $20 per share, giving you a profit of $1,200 — excluding any remaining time value or Greek sensitivity.
| Action | Details | Cost | Outcome if Stock = $70 |
|---|---|---|---|
| Buy 100 Shares | XYZ at $50/share | $5,000 | Profit: $2,000 |
| Buy 1 LEAPS Call | $50 Strike, 2-Year Expiry, Premium = $8 | $800 | Intrinsic Value: $2,000 → Profit: $1,200 |
Benefits
- Lower capital requirement compared to buying shares
- Leverage: higher percentage returns if the stock moves favorably
- Defined maximum loss (limited to the premium paid)
- Ideal for long-term bullish investors
Risks & Limitations
- Time decay still applies (though slower for LEAPS)
- No voting rights or dividends as with owning stock
- Option may expire worthless if stock doesn't rise sufficiently