Option LEAPS: Deep In-the-Money, Long-Term Bullish Strategy
Long-term Equity Anticipation Securitiess (LEAPSs) are listed equity options with long tenors — Cboe lists them up to 39 months from initial listing, so roughly three years instead of the two years commonly quoted. 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. Numbers: with the stock at $100, a two-year $60-strike call with a delta near 0.93 costs about $45 per share — $4,500 controls the exposure that $10,000 of stock would, and a $10 rise in the stock moves the option by roughly $9.30. The break-even at expiry is : you paid $5 of extrinsic value for two years of half-capital exposure.
Tax Nuance: If you hold the LEAPS contract itself for over a year, selling the contract triggers long-term capital gains treatment ( IRC §1222 defines the one-year line; the rate tops out at 20% plus NIIT). If you exercise instead, the holding period for the underlying stock starts fresh at exercise — it does not tack — so you would need to hold the shares another year for long-term rates. Selling the contract is therefore usually the better exit, for tax reasons on top of the extrinsic value you preserve.
- Theta Decay
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DITM LEAPS have minimal time decay (theta), so you avoid the rapid value erosion typical of short-term options.
- Flexibility
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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. On the position above: sell a one-month $110 call for $1.50, collecting $150 against the $4,500 outlay — the same income a covered-call writer earns on $10,000 of stock, though see the tax trap below before running this in a taxable account.
- Downsides
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You don’t receive dividends, and while you use less cash than buying shares, DITM LEAPS still require a significant upfront premium. Be careful how you count that dividend cost: it is not a surprise, because the forward price embedded in the LEAPS premium already discounts the expected dividend stream. You are not losing the dividends so much as declining to pay for them. It is leverage, and you can lose the entire premium if the stock finishes below the strike.
The PMCC tax trap. Selling a short-dated call against a long LEAPS call creates a straddle under IRC §1092 — two offsetting positions in the same underlying — and the qualified-covered-call safe harbor of IRC §1092(c)(4) does not rescue you, because that exception requires you to hold the underlying stock, which you do not. The consequences are real: losses on the losing leg are deferred while the winning leg stays open, and IRC §263(g), “Certain interest and carrying charges in the case of straddles” requires capitalizing, not deducting carrying charges. If you want to run a systematic buy-write, own the shares and write against them, or run the PMCC inside a retirement account where none of this machinery applies. Running a PMCC in a taxable account is choosing the one structure that gets the leverage benefit and the tax penalty simultaneously.