What is a LEAP Option? Definition, Formula, and Example
A LEAP (Long-term Equity AnticiPation Security) is a stock or index option with an expiration date more than 9 months away, giving traders long-dated leveraged exposure with slower theta decay than short-dated contracts.
What is a LEAP Option?
A LEAP — Long-term Equity AnticiPation Security — is a stock or index option with an expiration date more than 9 months in the future, with the longest available LEAPs reaching about 2.5 to 3 years out. LEAPs trade on the same exchanges as standard monthly options and follow identical Black-Scholes pricing mechanics, but the extended duration produces materially different Greek exposures: high delta, high vega, and low daily theta. Traders use LEAPs as a stock replacement, a long-term directional bet, or a hedge against a multi-year position.
How LEAPs Are Priced
LEAP premiums decompose into two components:
Premium = Intrinsic Value + Time Value
Where intrinsic value is max(S − K, 0) for calls and max(K − S, 0) for puts, and time value is driven by implied volatility, time to expiration, interest rates, and dividend expectations.
Key Greek profile relative to short-dated options:
- Delta — deep in-the-money LEAPs run 0.75-0.90, behaving like a leveraged stock position
- Theta — small daily decay early; accelerates inside the final 90 days
- Vega — large, often 5-10x a 30-day option, making LEAPs sensitive to IV changes
- Gamma — low, because the underlier moves matter less to delta with so much time remaining
Worked Example
On May 11, 2026 with AAPL at $215:
- AAPL Jan 2027 $200 call (LEAP): ask $32.50, delta 0.78, theta −$0.04/day, vega $0.62
- AAPL Jun 2026 $200 call (front-month): ask $17.40, delta 0.83, theta −$0.18/day, vega $0.18
The LEAP costs $15 more but delivers an additional 7 months of exposure and is one-quarter as sensitive to time decay. A 5-point IV expansion lifts the LEAP $3.10 versus $0.90 for the front-month. A 1-month time pass costs the LEAP $1.20 versus $5.40 for the front-month — exactly the tradeoff LEAP buyers want.
Stock replacement math: 100 shares of AAPL cost $21,500. One LEAP contract controls 100 shares for $3,250 — 6.6x leverage with downside capped at the premium paid.
When Traders Use LEAPs
Three primary use cases dominate:
1. Stock replacement — buy a 0.80-delta LEAP call instead of 100 shares, freeing capital for other positions while retaining most of the upside
2. Poor man's covered call — buy a LEAP call, sell short-dated calls against it monthly
3. Long-dated hedging — buy LEAP puts to insure a long stock position through earnings cycles or macro events
LEAPs are also the standard vehicle for thematic multi-year bets where weekly or monthly options would expire before the thesis plays out.
Limitations and Common Misconceptions
LEAPs carry real drawbacks:
- Wider bid-ask spreads — non-standard strikes can trade 2-5% wide, eating into edge
- Lower liquidity — large orders may need to be worked in slices
- Dividend risk — early assignment risk on deep ITM calls before ex-dividend dates
- Higher absolute capital — though leverage is favorable, the dollar premium is substantial
- Volatility risk — high vega means an IV crush after entry can drown the position even if direction is right
A common misconception is that LEAPs "don't decay." They do — just slowly at first. The decay curve is non-linear; by the time a LEAP enters its final 90 days, daily theta has often quadrupled from when the position was opened.