LEAPS Stock Replacement - Deep In-the-Money Calls Instead of Shares
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Compare a deep in-the-money LEAPS call with 100 shares on cost, break-even, maximum loss and how closely each follows the stock.
LEAPS stock replacement means buying a deep in-the-money call with a year or more to expiration instead of buying 100 shares of the stock. The call moves much like the shares for a fraction of the capital, and the most it can lose is the premium paid. In exchange you pay for time value, give up dividends, and accept an expiration date.
A LEAPS is an ordinary listed option with more than nine months to expiration. A call is the right to buy 100 shares at the strike price, and it is in the money when the stock is above that strike. Call Options Explained covers the basics; this lesson builds on them.
How does LEAPS stock replacement work?
You pick a call whose strike is well below today's stock price, with a long time to expiration. Because it is deep in the money, most of its price is intrinsic value (stock price minus strike), and its delta, the share-equivalent amount it moves for a $1 change in the stock, is high. The long expiration gives the stock time to move and keeps daily time decay low.
Worked example
LEAPS stock replacement example: XYZ 40 call vs 100 shares
XYZ, a fictional stock, trades at $50 and pays no dividend. Instead of buying 100 shares for $5,000, you buy one XYZ 40 call with 365 days left at its model value of $13.08, or $1,308. (Black-Scholes at 30% implied volatility and a 4.5% rate, the free OptionsPro calculator's defaults.)
- Intrinsic value: $50 - $40 = $10.00. Time value: $13.08 - $10.00 = $3.08, or $308. That is what the call costs you over the shares if XYZ ends the year exactly where it started.
- Delta: about 0.85, so today the call gains or loses about $85 for each $1 move in XYZ, versus $100 for the shares.
- Daily time decay: about $0.84 per contract per day with a year left. It speeds up as expiration nears.
At expiration, a year from now:
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
For the long LEAPS call, the three numbers that define the trade at expiration are:
- Maximum loss: $1,308, the premium paid, if XYZ is at or below $40 at expiration.
- Break-even: $53.08, the strike plus the premium.
- Maximum profit: unlimited in principle, because the call keeps gaining as long as XYZ keeps rising.
Above $40 the call's line runs parallel to the shares', $308 below it. Below about $36.92 the call is ahead, because its loss stops at $1,308 while the shares keep falling.
Deep in-the-money XYZ 40 call (365 days) vs 100 shares, at expiration
Hover or tap the chart, or focus it and use the arrow keys, to read any price.
Open this trade in the free calculatorShow as table
Why use a deep in-the-money LEAPS instead of shares?
Mostly to tie up less capital for similar exposure. In the example, $1,308 controls roughly 85 shares' worth of movement today, versus $5,000 for 100 shares. The remaining $3,692 can stay in cash, earning interest, or go elsewhere. The call also caps the dollar loss at the premium.
That leverage cuts both ways. If XYZ falls to $40 and stays there, the shareholder is down $1,000, or 20%, and still owns the stock. The call holder is down $1,308, or 100%, and the position is gone. See Why Traders Use Options for more on how leverage magnifies percentage results.
Interest is part of the price too. Buying the call instead of the shares defers paying the strike for a year, and the model charges for that: higher interest rates make calls more expensive.
How deep in the money should a LEAPS call be?
Deeper strikes behave more like the stock and carry less time value, but cost more. Shallower strikes are cheaper but behave less like the stock, and more of their price is time value you can lose.
How deep in the money? Four one-year XYZ calls
Cost per contract
Delta: dollars gained per $1 rise in XYZ, today
Time value per contract (lost by expiration if XYZ stays at $50)
The 50 strike is at the money, so its entire $700 is time value: it is a bet on a rise, not a stand-in for the stock. The 35 call tracks the stock most closely, but at $1,705 it ties up the most capital. Traders who use this approach commonly look for a delta somewhere around 0.70 to 0.90; that is a rule of thumb, and there is no single correct choice.
What do you give up with LEAPS stock replacement?
- Dividends. Only shareholders receive them. On a dividend-paying stock the expected dividends are priced into the call, which makes it cheaper, but you never collect them. Stock replacement suits non-dividend or low-dividend stocks better.
- Time. Shares can be held indefinitely. The call has a deadline, and if the stock is below the strike then, it expires worthless.
- Voting rights. Option holders do not vote at shareholder meetings.
- Liquidity. LEAPS often have wider bid-ask spreads than shares or near-term options. Crossing a $0.20 spread costs about $20 per contract round trip, roughly $10 each way against the midpoint.
- Volatility risk. A drop in implied volatility lowers the call's price even if the stock does not move. Deep in-the-money calls are less exposed than at-the-money ones, but not immune.
Many stock replacement traders do not hold to expiration. A common approach is to sell the call and buy a later one (a roll) while several months remain, before time decay speeds up. Holding a call instead of shares can also change how a gain is taxed; Course 4's Tax Treatment of Options module covers the general rules, and a tax professional can tell you how they apply to you.
Check your understanding
XYZ is at $50. A one-year XYZ 40 call costs $13.08. How much of that is time value?
Show answer
$3.08 per share, or $308 per contract. Intrinsic value is $50 - $40 = $10.00, and the rest of the premium is time value.
What is the break-even at expiration for that call, and what is the most it can lose?
Show answer
Break-even is $53.08, the $40 strike plus the $13.08 premium. The most it can lose is the $1,308 paid, if XYZ is at or below $40 at expiration.
Why does the at-the-money 50 call make a poor stock replacement?
Show answer
All of its price is time value, so it loses its entire premium if the stock is flat, and its delta (about 0.62) means it moves less like the stock than a deep in-the-money call.
Key takeaways
- Stock replacement swaps 100 shares for a deep in-the-money call with a year or more left.
- In the example, $1,308 replaces $5,000 of stock. The call's maximum loss is that premium; its break-even is the strike plus the premium; its upside has no fixed cap.
- The call's time value ($308 in the example) is the cost of the trade if the stock goes nowhere.
- Deeper strikes track the stock more closely and carry less time value, at a higher price.
- You give up dividends and voting, accept an expiration date, and can lose 100% of the premium.
Common questions
What delta should a stock replacement LEAPS have?
There is no single right number. Deeper in-the-money calls have higher delta and less time value but cost more. In this lesson's example a one-year 40 call on a $50 stock has a delta of about 0.85; a 35 call is about 0.93. Many traders look for roughly 0.70 to 0.90.
Do LEAPS calls receive dividends?
No. Only shareholders receive dividends. A call's price already reflects the dividends expected before expiration, which is one reason calls on high-dividend stocks are cheaper and stock replacement suits them less well.
Can a LEAPS call lose more than the stock?
In dollars, no: the most it can lose is the premium, while 100 shares can lose their full price. In percentage terms, yes: if the stock finishes at or below the strike, the call loses 100% of what you paid, while the shares may have lost far less.
When should you roll a stock replacement LEAPS?
Many traders roll to a later expiration while several months remain, before time decay speeds up and before the option loses its margin loan value at nine months. The right timing depends on the position and its costs.