LEAPS Options: A Sensible Investor's Guide

Why Most People Get This Wrong (And How Not To)

Let's start with what matters: LEAPS are just options with a longer fuse, typically one to three years instead of a few weeks or months. That's it. Nothing exotic, nothing fancy. But that extra time changes everything about how they behave and how you should use them.

The smart play? Buy deep-in-the-money calls when you want stock-like exposure without tying up all your capital. Then sell shorter-dated calls against them month after month to collect premium. Keep your risk sensible, follow a rolling schedule you can actually stick to, and understand that volatility will bite you if you're not careful.

Taxes matter. IRA rules matter. Get those wrong and you'll learn an expensive lesson.

What LEAPS Actually Are (No Marketing Fluff)

LEAPS stands for "Long-Term Equity Anticipation Securities," which is Wall Street's way of making something simple sound complicated. They're options that expire in one to three years instead of a few weeks.

Each contract still controls 100 shares, same as any option. The difference is time. More time means slower decay, bigger reactions to volatility shifts, and more room to maneuver. You can layer income strategies on top, which is where things get interesting.

How They Actually Work

LEAPS follow the same rules as any option. Price moves, time passes, volatility shifts, all of it matters. But here's what most traders miss: the Greeks behave differently when you've got years of runway instead of weeks.

Delta measures how much your option moves when the stock moves a dollar. You want this high, around 0.75 to 0.85, so you're actually tracking the stock.

Theta is time decay. With LEAPS, this happens slowly. That's the whole point. You're not bleeding money every day the way you would with weekly options.

Vega measures volatility sensitivity. This is where LEAPS can hurt you. When implied volatility drops, your long-dated options lose value even if the stock doesn't move. Deep in-the-money strikes help reduce this, but they don't eliminate it.

Most traders prefer deep-in-the-money calls because they behave more like stock. High delta, less time value to decay, smaller volatility headaches. That structure makes it easier to sell short-term calls against them repeatedly, which is the real game here.

Why Deep In-The-Money (And Why It Matters)

Here's the truth about strike selection: if you buy at-the-money or out-of-the-money LEAPS, you're making a volatility bet whether you know it or not. Most of your premium is extrinsic value, hope and time. When volatility drops or time passes, you lose even if you're right about direction.

Deep in-the-money calls with delta around 0.75 to 0.85 are different. Most of the premium is intrinsic value, actual equity in the option. You're paying for exposure to the stock's movement, not for lottery tickets.

This matters when you start selling calls against your LEAPS. The long leg needs to be stable. The short leg does the work. If your long call is bouncing around with every volatility hiccup, your whole structure falls apart.

After a big rally, check your delta. If it's pushing 0.90 or higher, your LEAPS are acting too much like stock and your short calls won't collect enough premium. Consider rolling up to a higher strike (and further out in time if needed) to reset the elasticity.

The Poor Man's Covered Call (PMCC): The Actual Strategy

This is where LEAPS become useful beyond simple stock replacement. The Poor Man's Covered Call is long LEAPS plus short calls you keep cycling for income.

It feels like a covered call, selling premium against equity—but you're tying up a fraction of the capital.

Here's the process:

1. Pick a liquid stock. You need tight spreads and real volume. Illiquid options are a tax on your returns.

2. Buy your LEAPS. Go 12 to 24 months out. Target 0.75 to 0.85 delta. Check the extrinsic value, you want it modest compared to the total premium.

3. Sell a short call. Go 30 to 60 days out. Pick a strike around 10 to 20 delta (out-of-the-money enough to give you breathing room). Collect the premium.

4. Manage it with rules, not feelings:

   • Take profits: Close the short call at 50% to 75% of max profit. Don't be greedy waiting for the last nickel.

   • Manage time: Around 21 to 28 days to expiration, buy back the short call and sell a fresh one 30 to 45 days out.

   • Defense: If the stock runs up toward your short strike, roll up and out to a higher strike. Keep the income flowing without getting squeezed.

5. Watch your LEAPS delta. If it drifts too high (over 0.90) or too low (under 0.60) for a while, consider rolling the LEAPS itself to re-center your exposure.

You're not predicting. You're running a process. Small premium wins compound if you stick to the system.

Rolling: When and Why

Short calls:

• Profit rule: Close at 50% to 75% of max profit. Take the win. Redeploy.

• Time rule: Around 21 to 28 days left, close and sell fresh 30 to 45-day calls. You're keeping theta on your side.

• Pressure rule: If the stock is testing your short strike, roll up and out one or two strikes. Keep the machine running.

The LEAPS itself:

• After a rally: If your delta is over 0.90 and short-call credits are getting thin, roll the LEAPS up (maybe out in time too) to restore sensitivity.

• Time decay checkpoint: When you're down to 9 to 12 months left, consider rolling out to fresher expirations. Theta accelerates as you approach expiration.

• After a drawdown: If the stock tanks and your delta drops way down, you can wait it out (time is still on your side) or roll down and out to re-center your position.

Rolling isn't admitting defeat. It's maintenance. Ignore it and your returns will suffer.

The Risks Nobody Likes to Talk About

Volatility cuts both ways. LEAPS have vega. When implied volatility drops, and it will, usually when you don't want it to, your long call loses value even if the stock sits still. Deep in-the-money helps. It doesn't eliminate the problem.

Assignment happens. It comes from your short call, not your LEAPS. Have a plan before it happens. Roll up and out. Or let it happen and re-establish. Know the ex-dividend dates if you're trading dividend stocks, that's when assignment risk spikes.

Liquidity is everything. Wide bid-ask spreads are a hidden tax. Trade names with volume and open interest. Check the spreads before you enter. If you're giving up 2% to 3% on entry and exit, your edge just vanished.

Events blow up structures. Earnings, guidance, macro surprises, these can gap price and volatility overnight. Size smaller around binary events. Widen your strikes. If you can't handle the gap risk, don't hold through the announcement.

Position sizing kills more traders than bad strategy. Keep individual positions small. Diversify across stocks and expiration cycles. Don't sell short calls too close to the money in fast-moving stocks.

Taxes: The Part You Can't Ignore

This is U.S. tax treatment, high-level. I'm not a tax advisor and you should talk to one.

Equity and ETF options (Apple, AMD, SPY) follow standard rules. If you hold your LEAPS more than a year, closing them can trigger long-term capital gains. Short-call premium is typically short-term.

Some broad-based index options that are cash-settled may qualify for Section 1256 treatment, 60% long-term, 40% short-term, regardless of how long you hold them. That's better tax treatment, but only certain contracts qualify.

Rolling creates complexity. Each roll is a close and an open. Basis changes. Holding periods reset or continue depending on the specifics. Keep good records.

Talk to a tax professional before you scale this. The IRS doesn't care that you didn't know the rules.

IRAs: What Actually Works

Most brokers let you buy calls, run covered calls, and sell cash-secured puts in IRAs. PMCCs, where you sell calls against a long LEAPS, are often allowed if the long call fully covers the short call and your account approval supports it.

IRAs don't allow margin in the traditional sense, so you need to structure things as covered or defined-risk. Check with your broker before you assume anything.

Three Real-World Setups

1) Growth stock with income overlay

Buy an 18 to 24-month deep in-the-money LEAPS around 0.80 delta. Sell 30 to 45-day calls around 15-delta. Take profits at 50% to 70%. Roll when needed.

If the LEAPS delta climbs over 0.90, roll up and out. Around earnings, consider smaller credits or wait until after the announcement.

2) Dividend stock, slower pace

Buy an 18-month deep in-the-money LEAPS with modest extrinsic. Sell 45 to 60-day calls (premiums will be smaller, accept it). Watch ex-dividend dates like a hawk. Assignment risk jumps.

The goal is stability and slow compounding, not fireworks.

3) Index exposure with income (SPY, QQQ, IWM)

Buy 12 to 18-month deep in-the-money LEAPS for core market exposure. Sell 30 to 45-day calls. Size the strikes to your comfort with market moves.

Use volatility and breadth signals to scale back or tighten up during turbulent periods.

Common Mistakes (That Cost Real Money)

Buying out-of-the-money LEAPS: Too much premium is time value and volatility. You're speculating, not investing. Fix: Go deep in-the-money with 0.75 to 0.85 delta.

Selling short calls too close: Thin margin for error. Constant adjustments. Fix: Favor 10 to 20-delta strikes. Don't chase the last dollar of premium.

Ignoring liquidity: Wide spreads destroy returns. Fix: Trade liquid names only.

Letting LEAPS run too long: Under 9 to 12 months, theta and vega shift. Fix: Plan your roll-outs early.

Oversizing positions: A few positions dominate your risk. Fix: Diversify across names and expirations.

Questions You'll Actually Ask

Are LEAPS only for calls? No. You can buy puts for hedging or bearish plays. Most income strategies use calls.

What delta should I target? Most traders prefer 0.75 to 0.85 for stock-like behavior with reasonable extrinsic value.

How often do I roll short calls? Common triggers: 50% to 75% profit, or 21 to 28 days to expiration—whichever comes first.

What if I get assigned early? Usually you can roll up and out before it happens. Around dividends, assignment risk spikes. Have a plan. If assigned, close or convert the position.

Do volatility changes matter if I'm deep in-the-money? Yes. LEAPS still have vega. Deep in-the-money reduces sensitivity but doesn't eliminate it.

Can I run this in an IRA? Often yes, if the long call covers the short call and your broker and approval level allow it.

What about taxes? Equity and ETF options follow standard holding-period rules. Some index options qualify for Section 1256 (60/40 treatment). Talk to a tax professional.

The Bottom Line

LEAPS aren't magic. They're a tool. Used correctly, deep in-the-money calls for durable exposure, short calls sold systematically for income, they can deliver steady returns with defined risk and less capital than buying stock outright.

Used incorrectly, out-of-the-money speculation, oversized positions, ignoring volatility and liquidity, they'll teach you expensive lessons.

The difference between the two outcomes is process. Rules. Discipline. Not prediction, not market timing, not hope.

Most people won't do this right because it's boring. It requires following the same steps month after month. But boring compounds. And compounding is the only edge that matters.

Probabilities over predictions,

Andy Crowder

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Disclaimer: This is educational content only. Not investment, tax, or legal advice. Options involve risk and aren't suitable for all investors. Examples are illustrative. Real results will vary. Talk to professionals before you risk real money.