Chapter 25: LEAPS 409 
Thus, a neutral backspread involving LEAPS requires buyingfewer calls than a neu­
tral backspread involving a 6-rnonth option on the long side. This is because the delta 
of the LEAPS call is larger. The significant point here is that, because of the time 
value retention of the LEAPS call, even when the stock moves higher, it is not nec­
essary to buy as many. If one does not use the deltas, but merely figures that 3 to 2 
is a good ratio for any diagonal backspread, then he will be overly bullish if he uses 
LEAPS. That could cost him if the underlying stock declines. 
Calendar Spreads. LEAPS may also be used in calendar spreads - spreads in 
which the striking price of the longer-term option purchased and the shorter-term 
option sold are the same. The calendar spread is a neutral strategy, wherein the 
spreader wants the underlying stock to be as close as possible to the striking price 
when the near-term option expires. A calendar spread has risk if the stock moves too 
far away from the striking price (see Chapters 9 and 22). Purchasing a LEAPS call 
increases that risk in terms of dollars, not percentage, because of the larger debit that 
one must spend for the spread. 
Simplistically, calendar spreads are established with equal quantities of options 
bought and sold. This is often not a neutral strategy in the true sense. As was shown 
in Chapter 9 on call calendar spreads, one may want to use the deltas of the two 
options to establish a truly neutral calendar spread, particularly if the stock is not ini­
tially right at the striking price. Out-of-the-money, one would sell more calls than he 
is buying. Conversely, in-the-money, one would buy more calls than he is selling. 
Both strategies statistically have merit and are attractive. When using LEAPS deltas 
to construct the neutral spread, one need generally buy fewer calls than he might 
think, because of the higher delta of a LEAPS call. This is the same phenomenon 
described in the previous example of a diagonal backspread. 
SUMMARY 
LEAPS are nothing more than long-term options. They are usable in a wide variety 
of strategies in the same way that any option would be. Their margin and investment 
requirements are similar to those of the more familiar equity options. Both LEAPS 
puts and calls are traded, and there is a secondary market for them as well. 
There are certain differences between the prices of LEAPS and those of short­
er-term options, but the greatest is the relatively large effect that interest rates and 
dividends have on the price of LEAPS, because LEAPS are long-term options. 
Increases in interest rates will cause LEAPS to increase in price, while increases in 
dividend payout will cause LEAPS calls to decrease in price and LEAPS puts to