I’m trying to understand where LEAP options fit for a long-term investor.
From what I get, LEAPS (long-dated options, usually 1–2+ years out) are supposed to give you long-term exposure to a stock with less capital upfront. But at the same time, they’re still options at the end of the day, so there’s time decay and the possibility of losing 100% if things don’t go your way.
So I’m wondering…are LEAPS actually considered less risky than short-term options or are they still basically gambling compared to just buying shares? What’s the real advantage of LEAPS vs owning the stock outright? In what scenarios would a long-term investor choose LEAPS over just buying shares?
Trying to figure out if LEAPS are a smart tool for long-term exposure or just a more drawn-out way to take on option risk.
Are LEAP options considered “safer” or still basically gambling vs just buying shares?
byu/savingrace0262 instocks
Posted by savingrace0262
25 Comments
Would like to know the answer to this as well.
Be careful for what you get into.
I have gained pretty well from GOOGL and AAPL LEAPS but lost quite a bit in MSFT.
Sure, they’re “safer” but safer than what?
I would think it goes something along the lines of safest to riskiest:
BONDS, ETFS, Blue Chip Stocks, individual shares, Covered Calls, LEAPS, Options, 0DTE Options.
Cash, hedging strategies, other assets like real estate can find their place in there too, but can add more complexity to the conversation. The above is by no means an absolute sliding scale, but very generalized. Your mileage may vary.
You can typically map out your exposure using something like an Options Calculator. If your underlying goes down X, you would lose Y. And then you can compare that to shorter dated options.
Heck, you could do a LEAP and do poor man covered calls off of that to hedge your downside.
Definitely less risky compared to short term options, more time = less risk. The deeper ITM they are, the less risky. Obviously riskier than shares. I like leaps if you want leveraged exposure to a stock but don’t want to get margin called during volatility.
LEAPS are just a way to go long on a stock with leverage. You are paying a time premium but compare it to the interest you would pay on a margin loan to buy more shares than you had cash for. Lets say a stock is $45 today and in 2 years you think it will be $65. A 2 year leap 55C is $3.50. You have $45,000. You can A. Buy 1,000 shares with your $45k or B. Buy leaps equivalent to 12,857 shares or C spend $3,500 to buy leaps equivalent to your 1,000 shares potential buy and deploy the rest of the money elsewhere. Lets say the stock does go to $65. Your results are: A. Profit of $20,000 (44%), B. Profit of $83,000 (184%) C. Profit of $6,500 (184%). Now you have the downside risk. Say instead of going to $65 if falls to $35. A. Loss to $10,000 B. Loss of $45,000 C. Loss of $3,500.
You are betting on an overall direction to occur in the confines of a longer period of time. You pay a time premium of some level. I have made money with LEAP trading. Covered LEAP can be a solid strategy
LEAPS are much less risky than short-term options since their time value decays much more slowly, and since it gives you more time to be right about the price direction (especially for calls). A good example of when to buy a LEAP as opposed to shares is for a stock that you don’t truly believe in for the very long-term, but which tends to have short spikes of extremely high share prices. Good examples of that would be TSLA and MSTR, which often spike into the 400+, but can go as low as 200 or even 100 sometimes
Everything is priced in. They’re more expensive than short term options for a reason, including the opportunity cost. And cheaper than stocks because they could become worthless.
It’s more a gamble than stocks because it can lose 99% of its value long before the stock does, and can 2x in value long before you reach the strike price.
Buying shares is always better from a risk perspective because you can hold them indefinitely without having to worry about theta risk. Issue with long call options is theta. Leap options decrease the theta risk because it gives you more time but doesn’t eliminate it.
Buy them deep ITM for less risk. 80 delta at least.
>What’s the real advantage of LEAPS vs owning the stock outright?
Just like you said, it is a long term exposure with less capital upfront.
>But at the same time, they’re still options at the end of the day, so there’s time decay and the possibility of losing 100% if things don’t go your way.
While both points are totally valid, you still have 1-2 years ahead of you to figure out whether you want to hold onto it all the way through expiration date or not. It is plenty of time to assess your specific investment.
More exposure for less money upfront. Poor man’s pathway to wealth
LEAPS aren’t gambling in the sense that you’re betting on black or red with 0 day options. Anytime you take on leverage you are taking on extra risk and the shorter you go out with the closer to at the money, the more risk you are taking on. Shares are essentially $0 strike options, so I can’t say that SPY shares are investing and a $5 strike SPY call expiring in Jan 2028 is gambling. It’s possible to use options wisely and there isn’t a line in the sand between smart use and gambling.
If you think of everything on a spectrum, LEAPS would probably be riskier than buying the stock, but probably less risky than buying options expiring in a week.
news: buying shares is also gambling
It’s definitely safer than 0DTEs….
I honestly can’t see how buying shares makes any sense unless it’s ATT. Now once the leap pays, that’s where I see the dilemma. But before taking a position, it’s a small loss or big gain. Once the leap is ITM convert it over to resize the position.
Like you said you can get exposure to an equity for less capital up front, so they’re a leveraging tool. If used properly they’re great but technically more risky than shares due to the time decay I suppose.
They’re definitely less risky than short dated options. Also, look into a Poor Man’s Covered Call (PMCC) strategy.
Leaps are awesome long. It gives you the option to just exercise for shares if you want but don’t necessarily want to spend the cash right away.
I like buy them for low risk high reward type plays. It’s more flexible and less opportunity cost than just buying shares and sitting around waiting forever
Less risky than short-term options. More risky than holding stocks.
Think of them as giving you leverage. The cheaper the LEAPS are (depending on end date and strike price), the more leverage you get. That’s good for you if you’re right and bad for you if you’re wrong. ATM LEAPS usually get you around 2x.
Compared to leveraged ETFs, LEAPS don’t have fees and they don’t decay when the price goes down, but they do have time decay and you stand to lose your whole investment if you’re ultimately wrong about which way the stock moves (although most people will sell or roll LEAPS before expiration).
Leaps are expensive, and less efficient due to lack of volume. You could wind up with terrible spread numbers. If the stock isn’t going up soonish or within the year, why would you want to hold unrealized equity for that long? If you think it will need 1-2 years to be profitable then buy shares.
Depends on if they are in the money or out of the money
In this economy it’s basically impossible to lose money with LEAPS. Just buy during big dips
Depends on how you use them
It depends on how you define the risk.
I could lose 70k buying 100 shares of SPY or about 13k buying an 80 delta leap. With the shares you can wait for it to come back, with the leap, you can’t wait forever.