LEAPS as Stock Replacement vs Buying Shares
Updated
Stock replacement means buying a deep in-the-money LEAPS call — usually delta 0.75–0.85 — instead of 100 shares. It ties up far less capital and caps the dollar loss at the premium, but it loses a larger percentage when the stock falls, earns no dividends, and decays over time.
Setup
Illustrative example only — hypothetical stock XYZ at $100, implied volatility around 30%. Figures are rounded approximations, not live quotes, and ignore fees. One contract = 100 shares.
Compare buying 100 shares of XYZ with buying one Jan $80 LEAPS call (~540 days, delta 0.80) for $26.50, holding either for 12 months (about 180 days left on the option).
Capital and exposure at entry
| 100 shares | One $80 LEAPS call | |
|---|---|---|
| Capital committed | $10,000 | $2,650 |
| Exposure (delta × 100) | 100 shares | ≈ 80 shares |
| Maximum loss | $10,000 | $2,650 |
| Dividends (assume $2/share/yr) | +$200 | None |
| Voting rights | Yes | No |
| Time limit | None | Expires in ~18 months |
Outcomes after 12 months
| XYZ price | Shares P&L (incl. dividend) | LEAPS value (approx.) | LEAPS P&L |
|---|---|---|---|
| $120 (+20%) | +$2,200 (+22%) | ≈ $42.00 | +$1,550 (+58%) |
| $100 (flat) | +$200 (+2%) | ≈ $23.00 | −$350 (−13%) |
| $80 (−20%) | −$1,800 (−18%) | ≈ $3.50 | −$2,300 (−87%) |
| $60 (−40%) | −$3,800 (−38%) | ≈ $0.30 | −$2,620 (−99%) |
Reading the comparison
The LEAPS makes about 70% of the shares' dollar gain on a rise using about a quarter of the capital. On a flat year it loses to decay while shares collect the dividend. On a 20% fall it loses nearly everything, while shares lose 18% — but the LEAPS' dollar loss is capped at $2,650, whereas a 40% fall costs shareholders $3,800.
The unused $7,350 matters. If it sits in cash or T-bills it earns interest; if it is spent on more LEAPS, the position is no longer a like-for-like replacement and the risk is several times higher.
When stock replacement tends to fit
- A defined-horizon thesis of roughly 6–18 months
- A wish to cap the dollar loss below the cost of the shares
- Stocks with little or no dividend
- Not a fit: long-term buy-and-hold with no exit date, or sizing up to control more shares than you would otherwise buy
Plan it like a share purchase — with an expiry
Record the share-equivalent exposure, the capital you would otherwise have used, and the date you will exit or roll the LEAPS. SwingLEAP's LEAPS tracker and planner keeps that plan next to the actual entries and exits. Strike and delta choice is covered in Choosing a LEAPS Strike and Delta.
Part of the LEAPS strategies series
New to long-dated options? Start with What Are LEAP Options?, which covers the contract basics and links every LEAPS strategy guide, including the poor man's covered call, rolling LEAPS and LEAPS as stock replacement.