====== LEAPS Option ======
A LEAPS Option (an acronym for **L**ong-Term **E**quity **A**nticipation **S**ecurities) is a special type of [[options contract]] with an expiration date that is much further into the future than a standard option. While typical options expire in a matter of weeks or months, LEAPS have a lifespan of more than one year, often extending up to three years from their issuance. This extended timeframe is their defining feature and is what makes them particularly interesting for a [[value investor]]. Because they don't expire quickly, LEAPS behave more like a long-term investment in the underlying [[stock]]. They allow an investor to control a large block of shares for a fraction of the cost of buying them outright. This provides a powerful way to gain exposure to a company's potential upside while risking a smaller, fixed amount of capital—the [[premium]] paid for the option. The long runway gives a well-researched investment thesis the ample time it needs to play out, perfectly aligning with a patient, value-oriented strategy.
===== How LEAPS Work =====
At their core, LEAPS are just like any other option. They come in two main flavors:
  * **LEAPS [[Call Option]]**: Gives the holder the //right//, but not the //obligation//, to **buy** 100 shares of a stock at a predetermined price (the [[strike price]]) on or before the expiration date. You would buy a LEAPS call if you are bullish and believe the stock's price will rise significantly over the long term.
  * **LEAPS [[Put Option]]**: Gives the holder the //right//, but not the //obligation//, to **sell** 100 shares of a stock at the strike price on or before expiration. You might buy a LEAPS put to protect a long-term stock holding from a potential major downturn, acting as a form of insurance.
The key difference is **time**. The price of an option (the premium) is made up of [[intrinsic value]] and [[extrinsic value]]. Extrinsic value is essentially the "time value" of the option. Because LEAPS have so much time until they expire, their premiums are higher than those of short-term options on the same stock, but the rate of [[time decay]] (the erosion of this time value) is much, much slower.
===== LEAPS from a Value Investor's Perspective =====
For value investors, LEAPS aren't for wild speculation. Instead, they are a strategic tool for capital efficiency and risk management.
==== The "Stock Replacement" Strategy ====
This is one of the most popular and practical uses for LEAPS. Imagine you've analyzed a company, "ValueCo," currently trading at $50 per share. You believe it's undervalued and want to invest $5,000.
  - **Option 1: Buy the Stock.** You could buy 100 shares of ValueCo for $50 x 100 = $5,000.
  - **Option 2: Use a LEAPS Call.** Instead, you could buy a single LEAPS [[call option]] contract with a strike price of, say, $40, that expires in two years. This is known as a deep [[in-the-money]] call. Let's say the premium for this contract is $15 per share, or $1,500 total ($15 x 100 shares).
With the LEAPS call, you've spent only $1,500 to control the same 100 shares. You now have exposure to nearly all the upside of owning the stock, but your maximum loss is capped at the $1,500 premium you paid. The remaining $3,500 of your capital is now free to be invested elsewhere, perhaps in a low-risk asset like government bonds, or held in cash to seize another opportunity. This strategy works because a deep in-the-money call has a high [[Delta]], meaning its price moves almost in lock-step with the underlying stock price. A Delta of 0.85, for example, means the option's price will increase by about $0.85 for every $1 the stock goes up.
==== Buying Time for Your Thesis ====
Value investing is a marathon, not a sprint. It can take years for an undervalued company's true worth to be recognized by the market. Standard options, which expire in 30-90 days, are simply too short for this approach. They force you to be right about //when// the stock will move. LEAPS, with their 1-to-3-year lifespans, allow you to be right about //what// the stock will do, giving your investment thesis the necessary time to mature without the constant pressure of a ticking clock.
===== Risks and Considerations =====
While powerful, LEAPS are not without their risks.
  * **Premium Risk**: This is the big one. If your thesis is wrong and the stock price doesn't rise above your [[break-even point]] (strike price + premium paid) by expiration, your option can expire worthless. Unlike owning the stock, where you still own a piece of the business, with an option you can lose 100% of your initial investment.
  * **Slower Time Decay, But Still Decay**: The "time decay" on a LEAPS option, known as its [[Theta]], is very slow at first but accelerates dramatically in the last few months before expiration. A LEAPS option effectively turns into a short-term option as it nears its end date, and its value can evaporate quickly if the stock isn't moving in the right direction.
  * **Complexity**: Options are derivative instruments and are inherently more complex than stocks. To use them effectively, an investor must understand concepts beyond just the stock price, including the [[Greeks (options)]] (Delta, Theta, [[Gamma]], [[Vega]]) and [[implied volatility]], all of which influence the option's price.