The LEAPS Math Nobody Shows You on YouTube

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The video explains LEAPS options as a form of leverage, emphasizing the impact of time decay. A LEAPS option with a 0.75 delta and approximately 2.5 years until expiration has a daily theta cost of about $7. The same option with 1.5 years until expiration has a daily theta cost of about $8. An at-the-money (ATM) strike option with 90 days to expiration has a theta of roughly $15 per day, and one with 45 days to expiration has a theta of about $21 per day. Critically, an ATM option with only 7 days to expiration experiences a theta of approximately $48 per day, representing about 8% of its capital daily if the underlying asset is flat. This escalating theta cost as expiration approaches is termed 'time decay.' The video contrasts this with margin leverage, highlighting that LEAPS have a defined maximum loss equal to the premium paid, unlike margin accounts which can result in losses exceeding the initial investment due to margin calls. It further illustrates that with $250,000, one can achieve a market exposure equivalent to 1,125 shares of SPY using LEAPS (at 75 beta), compared to 352 shares of SPY if investing directly, offering over three times the market exposure for roughly the same capital deployed. The key takeaway is that LEAPS, when chosen with longer expirations and out-of-the-money strikes (on the 'plateau' of the theta decay curve), offer significant leverage with manageable time decay, unlike short-term options which face rapid theta decay ('the cliff').

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