A long-term equity anticipation security (LEAP) is a type of options contract that allows investors to buy call or put options with expiration dates over one year into the future. Like all options, LEAPs grant the holder the right—but not the obligation—to buy or sell the underlying security at a predetermined strike price prior to a set expiration date.
LEAP options provide benefits compared to traditional, short-term options contracts. Since LEAPs have a longer time frame until expiration, they experience less time decay, allowing investors to employ long or short strategies with less capital outlay. By purchasing LEAP call options, traders can control shares of an individual stock for a fraction of the cost of owning the common stock outright, while still benefiting if the share price rises.
This article will showcase LEAP options strategies through two investor examples. First, I will discuss my own recent purchase of long-dated call options on Joby Aviation. By buying these longer-term contracts, I aim to benefit from a potential increase in Joby’s share price over time while risking less capital than purchasing the stock itself.
Second, I will analyze a bullish LEAP trade placed by Nancy Pelosi on Nvidia stock options. Her large investment in deep-in-the-money LEAP calls provides exposure to Nvidia’s stock price movement with less cash upfront than buying the shares outright.
Through these examples, readers will learn how LEAPs can be utilized by both individual and institutional investors to implement options strategies across longer time horizons. The post will demonstrate the benefits of LEAPs for long-term investors looking to speculate on a stock’s price movement using less capital than purchasing the equity itself.
Long-Term Equity Anticipation Securities (LEAPs): A Definition
A long-term equity anticipation security (LEAP) is a type of option contract that allows traders to speculate on the movement of an individual stock over a longer time frame than traditional or standard options. While puts and calls typically have expirations of less than one year, LEAPs have expiration dates over 12 months out, often two or more years into the future.
Just like other stock option contracts used in options trading strategies, LEAPs give the holder the right—but not the obligation—to buy (calls) or sell (puts) shares of the underlying stock at a preset exercise price prior to expiration. However, LEAPs can require less initial investment than owning the shares outright. For example, a bullish trade can leverage LEAP call options to benefit if a stock price rises over a longer term, risking only the premium paid rather than the entire investment that purchasing shares of stock would require.
With their further-out expiration dates, LEAPs experience less time value decay than shorter-term options. This makes LEAPs potentially attractive for long-term investors employing options strategies to speculate on a stock’s anticipated price movement over an extended time frame, while risking a smaller outlay than buying the shares themselves.
Nancy Pelosi Buys 50 Nvidia LEAPs
Nancy Pelosi and her husband Paul are widely regarded as stock trading gurus, frequently generating outsized returns by trading individual stocks. As Pelosi’s required disclosures reveal, she recently employed a long-term options strategy by purchasing 50 call option contracts on Nvidia which expire on December 20, 2024. While the call options have a strike price of $120, well below the current $488 share price for the underlying asset, the LEAP calls allow Pelosi to control exposure to 5,000 Nvidia shares while tying up considerably less capital than buying the equity outright.
Specifically, Pelosi purchased these deep in-the-money long-dated options at a premium cost of about $373.70 per contract. With Nvidia over $368 above the $120 strike price, the LEAP call options have substantial intrinsic value built in. Rather than laying out $2.44 million to own 5,000 shares of a stock outright, Pelosi spent around $1.87 million on the LEAP contract premiums for similar exposure to upside (though with no voting rights).
This demonstrates how experienced investors like Pelosi often use long-dated call options rather than direct stock purchases to implement their equity exposure strategies. The deep in-the-money Nvidia LEAP calls require significantly less cash outlay than buying Nvidia shares straight-up, while providing similar benefits if Nvidia rises further.
By using LEAPs, Pelosi efficiently leverages her capital while structured to fully profit from Nvidia’s upside momentum over the next year. Her filing reveals how strategic investors rely on long-term options to capitalize on their highest conviction stock picks over an extended timeframe.
My Joby Aviation Moonshot
I recently utilized a long-term options strategy by purchasing 10 LEAP call option contracts on Joby Aviation with a January 2025 expiration. These longer-dated call options have a $10 strike price and cost me $1.295 per contract, representing a total cash outlay of $1,295 plus commissions.
As background, I actively trade individual stocks and utilize technical indicators like the relative strength index (RSI) and Tom DeMark’s Combo indicator to identify potential areas of reversal. Earlier this year, Joby Aviation caught my attention after spiking on speculative news that it was progressing toward a key Federal Aviation Administration certification for its electric vertical takeoff and landing (eVTOL) aircraft. However, given uncertainties around the fledgling eVTOL market and timelines for commercialization, Joby tends to whipsaw based heavily on hype and expectations rather than fundamentals.
Look at the chart above. Note that in early July, it registered at 13 on a completed countdown for the Combo indicator. It then began its descent.
In September, Joby’s chart triggered several completed set-ups on the Combo indicator, signaling a potential nadir. Its share price continued drifting lower, hitting additional exhaustion points. At that point, I decided a reversal might come soon. I utilized a LEAP call option purchase to capitalize on any future spike over the next year, sparked by further speculative headlines while risking only the premium paid.
Essentially, I am betting that between now and January 2025, Joby will have some catalyst that sends its equity back above $10 per share. If this fails to materialize, the LEAP call options will decay significantly from the $1.295 I paid.
This strategy demonstrates how longer-dated call option contracts can provide exposure to upside stock price movements based on key events over an extended investment time horizon, while requiring less capital outlay than buying the common shares outright.
Long-term equity anticipation securities (LEAPs) provide a way for investors to implement options trading strategies across longer time horizons. By purchasing LEAP call options, traders can benefit from upside moves in a stock’s share price over a multi-year period, while risking only the premium paid rather than the full cost of buying the equity itself.
As demonstrated through Nancy Pelosi’s deep in-the-money LEAP purchase on Nvidia and my own speculative bet on Joby Aviation, the long-dated options contracts allow exposure to anticipated stock price appreciation over an extended timeframe for a fraction of owning the shares outright.
With their further-out expiration dates resulting in less time premium decay, LEAPs serve well for betting on high conviction investment theses playing out over the longer term. While inappropriate for short-term traders, the defined-risk leverage of LEAP calls provides inherent advantages over owning common stock for strategically speculating on a company’s multi-year growth prospects.
When used prudently by experienced investors like Pelosi, incorporating LEAPs into an equity exposure strategy allows for efficiently capitalizing on anticipated upside stock momentum over a longer time horizon.
Long-Term Equity Anticipation Securities (LEAPs): Frequently Asked Questions
What Are the Key Benefits of Using LEAPS?
There are several potential benefits to using LEAPS options strategies. First, they provide an extended timeframe. With expiration dates up to 2-3 years out, LEAPS give you more time for your investment thesis to play out. This can be useful if you have a longer-term bullish or bearish view. Second, LEAPS allow you to control a larger position in the underlying stock for a fraction of the cost of buying the shares outright, providing leverage and freeing up capital for other investments. Additionally, LEAPS offer flexibility and can be used in various ways including speculation, income generation from premiums, and hedging strategies like protective puts or covered calls. Finally, buying LEAPS caps your risk to the premium paid, unlike owning stock outright where losses could be unlimited. However, leverage works both ways so percentage losses can still be substantial if the trade goes against you.
What Strategies Are Best Suited for LEAPS Options?
There are three popular LEAPS strategies. One is using LEAPS to replace stock ownership i.e. buying deep in-the-money LEAPS calls provides leverage with less capital outlay compared to purchasing the stock directly. A second strategy is covered call writing: hold the underlying stock and sell out-of-the money LEAPS calls against your position to generate income from the premiums received. The third common approach is protective puts i.e. hedging downside risk in a stock you own by purchasing long-dated LEAPS put options. Gains in the puts can help offset losses if the stock declines substantially.
How do LEAPS Options Differ from Regular Options?
LEAPS have a few key differences compared to standard monthly options. First, they have longer expirations. LEAPS can expire two to three years out versus less than one year for regular options. Second, the extended timeframe also means higher premium costs because there is more time value priced into LEAPS. Third, time decay is slower initially for LEAPS given the more distant expiration date, although theta decay accelerates significantly in a LEAPS option’s final year. Finally, since they are longer term in nature, LEAPS may exhibit lower implied volatility versus short-term options. In other respects like contract terms, exercise rules, risk profiles, and taxation, LEAPS function similarly to regular options.
- Mark Fortune is a seasoned journalist and editor with more than two decades of experience. Specializing in technology, cryptocurrency, and stock investments, his incisive writing has made significant contributions to the business journalism field. Mark’s work is celebrated for its depth, clarity, and influence on a global readership.
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