A LEAP is a long-term options contract—typically expiring 1-3 years out (versus standard monthly options at 30-90 DTE).

LEAPS unlock a different way to think about options trading: multi-year thesis, controlled risk, and leverage on conviction plays. Instead of managing trades weekly, you hold positions across quarters and years.

Most traders ignore LEAPS because they seem boring compared to weekly option spreads. But institutions use them constantly for portfolio hedges, conviction bets, and leveraged long positions. We'll break down the strategy.

LEAPS Mechanics: Time is Your Advantage

Example (Tesla LEAPS call):

Current TSLA price: $280
Buy 1 LEAPS call
Strike: $290 (slightly OTM)
Expiration: January 2027 (26 months out)
Premium paid: $60 ($6,000 per contract)
Breakeven: $350 ($290 strike + $60 premium)
Max profit: Unlimited (if TSLA soars to $500+)
Max loss: $6,000 (the premium)

Why it's different from standard options:

You're not racing against theta; you have 26 months of runway
Stock can consolidate for 12 months, then soar—you benefit
You avoid rolling expirations every month
Leverage: $6,000 gives exposure to $28,000 of stock ($280 × 100 shares)

Strike Selection for LEAPS: Delta and Multi-Year Thesis

With 26 months, you can afford to be more conservative on strike selection.

Fundamental Approach: Where Will Stock Trade?

Instead of thinking "what's the probability this expires ITM," think: "Where do I expect this stock in 2 years?"

Example (Tesla LEAPS):

Current: $280
5-year target: $400 (analyst consensus)
2-year expected: $350 (progress toward goal)
Strategy: Buy $320 LEAPS call
- Strikes between current price and 2-year target
- Delta ~0.65 (65% chance call is ITM in 26 months)
- Upside: $80 ($400 - $320)
- You only need stock to reach $350+ to double your money

Delta Guidelines for LEAPS

Delta 0.80-0.90: Very conservative, ITM call (stock needs minimal move)
Delta 0.60-0.75: Balanced (stock needs 10-20% upside to profit)
Delta 0.40-0.60: Growth bet (stock needs 20-40% upside)
Delta 0.20-0.40: Speculative (stock needs 40%+ upside)

For LEAPS: Target delta 0.60-0.75 for multi-year thesis.

Cost vs Buying Stock: The Leverage Advantage

Compare LEAPS calls to buying stock outright:

Scenario: Bullish on Apple 2-year outlook

Method	Capital	Upside at $300	Downside	Profit at $300
Buy 100 shares at $230	$23,000	$7,000 (3%)	-$23,000 (all)	$7,000
Buy 2 LEAPS calls at $240, $10 premium	$2,000	$12,000 (200%)	-$2,000 (all)	$10,000
Ratio:	11.5:1	1.7:1	Limited vs unlimited	1.4:1

Insight: With 11.5x less capital, you capture 1.7x the upside. That's leverage.

LEAPS + Poor Man's Covered Calls (PMCC): The Synergy

This is where LEAPS become powerful.

A Poor Man's Covered Call (PMCC) means:

Buy long-term LEAPS call (your "synthetic stock")
Sell short-term monthly calls against it
Collect premium from monthly calls, keep selling
Let LEAPS appreciate long-term while taking monthly income

Real example:

Month 1:

Buy $230 LEAPS call (strike $240, 26 months) for $12
Sell $250 call (30 DTE) for $3
Net cost: $9
Collect premium from short call, protect with long LEAPS

Month 2:

AAPL at $255
Short call assigned, forced to sell at $250
But you still own LEAPS ($240 strike)
Sell new monthly call at $260 for $4
Keep collecting premium

Year 1 cumulative:

Sold 12 monthly calls, collected $36 total premium
AAPL LEAPS now worth $35 (intrinsic + time value)
Return: ($35 + $36) / $9 cost = 789% return

This is how professionals generate income and long-term growth simultaneously.

DTE and Time Decay: Longer Runway Means Slower Decay

This is the magic of LEAPS.

Theta Decay Comparison

Standard 30-DTE call:

Theta: -$0.04 per day
Weekly decay is noticeable
By day 21, premium crashes

1-Year LEAPS call (365 DTE):

Theta: -$0.005 per day (10x slower!)
Monthly decay is gradual
By month 6, still 50% of time value left

2-Year LEAPS call (730 DTE):

Theta: -$0.003 per day
Almost no daily decay impact
After 1 year, still ~70% of time value remains

Implication: Your LEAPS call doesn't race against time. You can hold 12+ months without worrying about expiration.

LEAPS Expiration Dates and Calendar Strategy

Standard LEAPS expirations: January (every year) and some June/July expirations.

Why January LEAPS Matter

Most LEAPS expire in January—both current year and far future.

Jan 2026 LEAPS: ~13 months out (current year)
Jan 2027 LEAPS: ~25 months out (2 years)
Jan 2028 LEAPS: ~37 months out (3 years)

Strategy: Buy Jan 2027, sell monthly calls against it.

When Jan 2027 LEAPS approaches, you're only 1-2 months out. At that point:

Option A: Close the LEAPS, pocket profits
Option B: Roll to Jan 2028 LEAPS, continue PMCC income generation

This calendar layering is how traders avoid ever "expiring" their positions.

Implied Volatility Impact on LEAPS

With 26 months of time value, IV changes have HUGE impact.

IV Expansion (Good for LEAPS Buyers)

IV rises from 20% to 40%
Your LEAPS call value increases even if stock price is flat
Example: $240 LEAPS call worth $10 at IV 20%, worth $15 at IV 40% (no stock move!)

IV Compression (Bad for LEAPS Buyers)

IV drops from 40% to 20%
Your LEAPS value decreases even if stock rallies
Post-earnings or post-event IV crush affects LEAPS less than monthlies (still 24 months of time value)

Strategy: Buy LEAPS when IV percentile is 30-50% (not extreme). IV usually mean-reverts, so buying at moderate levels is safer.

Tax Implications: Section 1256 Consideration

This is tricky.

Standard LEAPS calls:

Short-term capital gain/loss (unless held >1 year, rare for options)
Taxed as ordinary income

Section 1256 contracts (if applicable):

Some brokers treat LEAPS as Section 1256
60% long-term / 40% short-term treatment regardless of hold time
Better tax treatment

Strategy:

Use LEAPS in IRAs (Roth or Traditional) to avoid tax complexity
In taxable accounts, coordinate with tax-loss harvesting

Real LEAPS Examples

Example 1: NVIDIA Conviction Play

Setup (January 2025):

NVIDIA at $140, consensus 2-year target $250+
Buy 2 Jan 2027 LEAPS calls
Strike: $160 (delta 0.65)
Cost: $15 each = $3,000 per contract × 2 = $6,000 total

Year 1:

NVIDIA rallies to $200
Sell monthly $210-220 calls against LEAPS
Collect $5-8 per month in premium = $60-96 per year
Year 1: Premium collected + LEAPS appreciation = $3,000-5,000 profit

Year 2:

NVIDIA hits $280
LEAPS now worth $120+ (intrinsic $120 + time value)
Jan 2027 LEAPS approaching expiration
Close LEAPS, bank $12,000+ total (including premiums collected)
Return: $12,000+ / $6,000 = 2x+ in 24 months

Example 2: Conservative Income on Microsoft

Setup (January 2025):

Microsoft at $380, want steady income
Buy 1 Jan 2027 LEAPS call
Strike: $390 (delta 0.70, very conservative)
Cost: $22 = $2,200

Monthly income:

Sell Jan $400 call (monthly) for $4-5
Repeat every month, collect $50-60 per month = $600-720/year
Year 1: Premium income + LEAPS appreciation = $1,500+ profit
Year 2: Similar income generation

Philosophy: Boring, steady, reliable. Less sexy than day trading but better compounding.

Entry Timing: When to Buy LEAPS

Best Times

1. After market correction

Stock down 15-25% from highs
Fundamental thesis still intact
LEAPS are cheaper than they were
Buy with conviction

2. After earnings (next day)

IV crush happened
LEAPS are now cheaper
If long-term thesis intact, great entry

3. When IV percentile is 30-50%

Not at extremes
Good risk/reward balance
Premiums are reasonable

Avoid

Peak IV (>80%): Options too expensive
At all-time highs: Risk/reward is poor
When thesis weakens: Don't buy LEAPS blindly

Exit Strategies for LEAPS

Exit When:

Thesis breaks
- Fundamental reason to own changed
- Sell LEAPS, move to next idea
Stock reaches 2-year target faster than expected
- NVIDIA hits $300 (your 2-year target) in 10 months
- Sell LEAPS, bank profit
- Don't get greedy, let it run further—rebalance
LEAPS within 6 months of expiration
- Time value collapses near expiration
- Roll to next-year LEAPS or close
- Prevent final-month theta collapse

Example Exit Rules

50% of position at 2x profit (lock in gains early)
Remaining 50% trail with 25% stop (protect winners)
Exit 100% if thesis breaks or -50% loss (cut losers)

Building a LEAPS Portfolio

Conservative approach (stable retirement income):

3-5 LEAPS calls on blue chips (MSFT, AAPL, NVDA)
Sell monthly calls against each for income
Hold 2+ years, compound returns
Est. annual return: 15-25%

Aggressive approach (growth):

5-8 LEAPS calls on growth stocks (TSLA, AI-related)
Fewer short calls (let LEAPS run more)
Roll positions annually
Est. annual return: 30-50%

Hybrid approach (balance):

3-4 LEAPS for income (blue chips, sell monthlies)
2-3 LEAPS for growth (no selling calls, pure appreciation)
Rebalance annually
Est. annual return: 20-35%

Common Mistakes to Avoid

Buying LEAPS at market peaks
- Stock at all-time high, IV high, premium expensive
- Better: Wait for correction
Choosing too-aggressive strikes
- Buy $300 LEAPS call when stock at $200 "for upside"
- Likely expires worthless
- Better: Delta 0.60-0.70 for realistic targets
Forgetting to sell monthlies against LEAPS
- Buy LEAPS and just hold
- Missing free income generation
- Better: PMCC strategy to generate consistent premium
Holding LEAPS into final 3 months
- Theta accelerates, time value evaporates fast
- Close by 6-month mark
- Lock in profits before final collapse
Over-leveraging
- Risk entire account on 1-2 LEAPS
- Better: 10-15% per LEAPS position

LEAPS vs Owning Stock: The Final Word

Factor	LEAPS Call	Stock
Capital	10%	100%
Upside	Leverage (higher %)	Linear (%)
Downside	Capped (premium)	Unlimited
Dividends	Miss them	Collect
Flexibility	Sell monthly calls	Sell covered calls
Time decay	Slow (2 years)	None
Tax	Ordinary income	Capital gains

Use LEAPS when:

You have strong multi-year conviction
You want leverage with capped risk
You plan to sell monthlies (PMCC)

Use stock when:

You want dividends
Tax efficiency matters
You don't need leverage

Within Cluster:

LEAPS Options Strategy: Long-Term Investing with Options