What Makes a LEAP?
LEAP stands for Long-term Equity AnticiPation Security. It's an options contract with an expiration date more than 12 months away — typically 1 to 2.5 years out.
Because they have so much time, LEAPs behave more like stock positions than short-term options. They're slower to decay, highly sensitive to price movement, and require significantly less capital than buying shares outright.
Long-Dated Theta Dynamics
Theta is the rate at which an option loses value each day due to time passing. For short-term options, theta decay is fast — especially in the final 30 days.
For LEAPs, theta decay is slow and gradual in the early months. This is a key advantage: you have over a year for your thesis to play out without the clock working hard against you.
LEAP time decay compared to short-term option
The tradeoff: LEAPs cost more upfront (higher absolute premium) because you're buying more time.
Using LEAPs as Stock Replacement
The most popular use of LEAPs is as a stock replacement strategy. Instead of buying 100 shares of a $900 stock ($90,000), you buy a deep in-the-money LEAP call with a 0.80–0.90 delta.
Example:
- Stock: NVDA at $900
- Buy the $700 LEAP call, 18 months out
- Cost: ~$25,000 instead of $90,000
- Delta: ~0.85 — moves like owning 85 shares
You get nearly the same upside exposure at a fraction of the capital. If the stock rises $50, your LEAP gains approximately $42.50 per share ($4,250 total).
LEAP vs stock ownership comparison
Risk Profile
The maximum loss on a LEAP call is the premium paid. Unlike owning stock, you cannot lose more than your initial investment.
However, LEAPs can lose significant value if:
- The stock stays flat — delta decays as the option moves further OTM
- IV collapses after a high-volatility event (buy LEAPs when IV is relatively low)
- Time passes and the stock hasn't moved enough to overcome premium paid
Position sizing discipline is critical: no single LEAP should represent more than 5–10% of a portfolio.