LEAPS Call vs. Short-Dated Call

The same 30 flat days, wildly different outcomes

Option price = intrinsic value + time value. A 30-day at-the-money Call is in its fastest Theta phase and goes to zero if the stock doesn't move; the same Call with 730 days loses only about 2% (illustrative: 30% volatility).

LEAPS = giving your view plenty of time

LEAPS expire more than a year out. They cost more, but lose very little time value each day: even if the stock doesn't rise in the short term, they have plenty of time to wait.

In-the-money LEAPS ≈ owning stock for less

In-the-money LEAPS often have a Delta above 0.7: the stock rises $1 and the option rises about $0.7, yet it takes only a fraction of the stock's price in cash. The catch is that the premium still includes time value, which slowly drains away if the stock doesn't rise over time.

Key takeaways

• LEAPS are long-term options expiring more than a year out. Their time value decays slowly, so they act more like "stock with leverage".
• Short-dated options are cheap and highly leveraged, but if the stock doesn't rise in time they easily go to zero.
• Option price = intrinsic value + time value. Time is what you're paying extra for with LEAPS.
• In-the-money LEAPS often have a Delta above 0.7, letting you roughly mimic owning the stock with less capital, but if the stock goes nowhere for a long time, time value still slowly drains.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Switch to “Zoom into the first 60 days” and play: how does the 30-day Call's value plunge in the last few days before expiration?
2. Set the underlying's annual growth to +5% (a slow rise) and play: what's the short-dated Call's return on day 30? And the LEAPS?
3. Raise the growth to +60%: the short-dated Call's return may be higher. That's the other side of high leverage.
4. Set the strike to $80 (in the money) and play again: after the short-dated Call expires, is the LEAPS Delta in the explanation card closer to 1?

Quiz and explanations

1. What's the main advantage of a LEAPS call over a 30-day call?

Answer: It gives the stock more time to rise and decays slowly.LEAPS cost more, but they have plenty of time and decay very little each day.

2. If the stock moves sideways in the short term, which option loses value faster?

Answer: The 30-day call.The short-dated option is right in its fastest-decaying phase.

3. The stock sits flat at $100 for 30 days (volatility 30%). What happens to a 30-day at-the-money call (cost about $3.59) and a 730-day at-the-money LEAPS (cost about $20.28)?

Answer: The 30-day call goes to zero; the LEAPS is worth about $19.81, down only about 2%.The 30-day call has no intrinsic value at expiration: −100%. The LEAPS still has 700 days left and loses only about $0.47 of time value.

Terms in this lesson

• Delta: Roughly how much an option's price changes when the underlying rises $1; near 1 deep in the money, near 0 far out of the money.
• intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
• LEAPS: Long-term options (Long-term Equity AnticiPation Securities), usually with more than a year until expiration.
• strike price (Strike): The price written into an option contract at which you can buy or sell.
• Theta: How much value an option loses with each passing day; the decay speeds up as expiration nears.
• time value (Time Value): The part of an option's price above its intrinsic value, reflecting the chance it gains value before expiry; it melts away over time.
• volatility (Volatility): How wildly the underlying's price swings; the bigger the swings, the more expensive options get.