LEAPS (Long-term Equity AnticiPation Securities) are stock options with expirations up to 2 years out. Buying deep in-the-money (DITM) LEAPS calls () on stocks you’re bullish on mimics stock ownership with less capital outlay—often about half the cash required to buy the shares outright. This high delta means the option price moves almost dollar-for-dollar with the stock, and the lower break-even price reduces risk compared to out-of-the-money calls.
Tax Nuance: If you hold the LEAPS contract itself for over a year, selling the contract triggers long-term capital gains tax (max 20% for most high earners in 2026, see IRC §1222). However, if you exercise the option, the holding period for the underlying stock resets, so you’d need to hold the stock for another year to get LTCG rates.
DITM LEAPS have minimal time decay (theta), so you avoid the rapid value erosion typical of short-term options.
You can sell to close the LEAPS anytime, or use them for a “Poor Man’s Covered Call” (PMCC)—selling shorter-term calls against your LEAPS to generate income, simulating a covered call with less capital.
You don’t receive dividends (unlike stockholders), and while you use less cash than buying shares, DITM LEAPS still require a significant upfront premium. If the stock pays high dividends, this can be a material opportunity cost. It is a leverage, and you can lose the entire premium if the stock price falls below the strike price.
Deep ITM LEAPS let you control stock with less capital, minimize theta decay, and potentially qualify for long-term capital gains if you sell the contract after a year. They’re flexible for advanced strategies like PMCC but lack dividends and still require a sizable investment. They provide efficient leverage with defined risk, but careful tax and dividend analysis is essential.