Chapter 25: LEAPS 383 
buyer to less risk of time decay on a daily basis. This is true because the extreme neg­
ative effects of time decay magnify as the option approaches its expiration. Recall that 
it was shown in Chapter 3 that time decay is not linear: An option decays more rap­
idly at the end of its life than at the beginning. Eventually, a LEAPS put or call will 
become a normal short-term equity option and time will begin to take a more rapid 
toll. But in the beginning of the life of LEAPS, there is so much time remaining that 
the short-term decay is not large in terms of price. 
Table 25-2 and Figure 25-4 depict the rate of decay of two options: one is at­
the-money (the lower curve) and the other is 20% out-of-the-money (the upper 
curve). The horizontal axis is months of life remaining until expiration. The vertical 
axis is the percent of the option price that is lost daily due to time decay. The options 
that qualify as LEAPS are ones with more than 9 months oflife remaining, and would 
thus be the ones on the lower right-hand part of the graph. 
The upward-sloping nature of both curves as time to expiration wanes shows 
that time decay increases more rapidly as expiration approaches. Notice how much 
more rapidly the out-of-the-money option decays, percentagewise, than the at-the­
money. LEAPS, however, do not decay much at all compared to normal equity 
options. Most LEAPS, even the out-of-the-money ones, lose less than¼ of one per­
cent of their value daily. This is a pittance when compared with a 6-month equity 
option that is 20% out-of-the-money- that option loses well over 1 % of its value daily 
and it still has 6 months of life remaining. 
From the accompanying table, observe that the out-of-the-money 2-month 
option loses over 4% of its value daily! 
Thus, LEAPS do not decay at a rapid rate. This gives the LEAPS holder a 
chance to have his opinion about the stock price work for him without having to 
worry as much about the passage of time as the average equity option holder would. 
An advantage of owning LEAPS, therefore, is that one's timing of the option pur­
chase does not have to be as exact as that for shorter-term option buying. This can be 
a great psychological advantage as well as a strategic advantage. The LEAPS option 
buyer who feels strongly that the stock will move in the desired direction has the lux­
ury of being able to wait calmly for the anticipated move to take place. If it does not, 
even in perhaps as long as 6 months' time, he may still be able to recoup a reason­
able portion of his initial purchase price because of the slow percentage rate of decay. 
Do not be deluded into believing that LEAPS don't decay at all. Although the 
rate of decay is slow (as shown previously), an option that is losing 0.15% of its value 
daily will still lose about 25% of its value in six months. 
Example: XYZ is at 60 and there are 18-month LEAPS calls selling for $8, with a 
striking price of 60. The daily decay of this call with respect to time will be minus-