LEAPS vs buying shares: which one should you own?
A long-dated call gives you most of a stock's movement for a fraction of the money. It also pays no dividends, carries no vote, and has a date on it. The shares have none of those limits and cost ten times as much.
The short answer
LEAPS are just options with a long life — a year or more to run. Buying one call controls 100 shares for a small part of what the shares cost.
Buying 100 shares costs the full price and gives you the real thing: dividends, a vote, and no deadline.
Four differences decide this, and only four:
- Capital. The call ties up a fraction of the money.
- Dividends. The shares collect them. The call collects nothing.
- Votes and ownership. Shares are ownership. A call is a right that ends.
- The deadline. Shares let you be early and wait. A call doesn't.
Everything else people argue about comes out of those four.
Side by side
| One LEAPS call | 100 shares | |
|---|---|---|
| Money down | A fraction of the share price | The full price |
| Worst case | Every dollar you paid | The shares going to zero |
| Dividends | None, and expected ones are already priced in | Yours |
| Vote | No | Yes |
| Deadline | A fixed expiry date | None |
| A flat year | You lose time value | You collect dividends |
| Can you sell calls against it | Only as a diagonal | Yes, directly |
| Taxes | Depends on the trade and the account | Depends on the account |
| Broker permission | The lowest options level, usually | None |
A worked example (hypothetical)
Riverbend Utilities, a made-up stock, trades at $50 and pays $0.50 a quarter, so $2.00 over a year. This is an illustration, not a trade idea.
- 100 shares: $5,000 out. Over the year the dividends add $200.
- One 12-month $50 call: $6.00, so $600 out. No dividends.
The call's break-even is $50 + $6.00 = $56. The shares, with the dividends counted, break even at $48. That eight-dollar gap is what you pay for the leverage, before the stock does anything at all.
| Riverbend in 12 months | 100 shares ($5,000 + $200 dividends) | One $50 call ($600) |
|---|---|---|
| $30 | −$1,800 | −$600 |
| $40 | −$800 | −$600 |
| $48 | $0 | −$600 |
| $50 | +$200 | −$600 |
| $56 | +$800 | $0 |
| $70 | +$2,200 | +$1,400 |
Take the $40 row, a 20% drop — the row the plan has to survive.
The shares are down $1,000, softened to −$800 by the dividends. Painful, and still yours. You can sell calls against them, collect the next four dividends, and give the stock another five years to come back.
The call is down −$600. A smaller number. But it is every dollar you put in, there is nothing left to recover with, and it did not need a 20% drop to get there — any finish below $50 does the same thing.
Now the $50 row, which is worse in a quieter way. Riverbend went nowhere for a year. The shares paid you $200 for the wait. The call handed back everything. Doing nothing is a loss for one of these and a small win for the other.
The sizing trap
"The call only costs $600" is where most of the damage happens.
Your $5,000 buys eight of those calls instead of 100 shares. On the $40 row, eight calls lose $4,800 — nearly the whole account — while the shares lose $800 and stay in your hands.
The honest comparison is never one call against 100 shares. It is the same dollars either way. Compare one call against one hundred shares and the call looks careful. Compare $5,000 of calls against $5,000 of stock and you can see what you actually bought.
Why the call is cheaper than it looks, and more expensive than it looks. A call's price already has the expected dividends taken out of it, so you don't "miss" them twice. But it also contains time value, and that part is gone by expiry no matter what the stock does.
What a LEAPS can't do for a seller
If you run the wheel strategy, the shares are the engine. Assigned at $45, you sell calls against those 100 shares for as long as it takes. There is no clock.
Do the same thing against a long call and you have a poor man's covered call — which works, costs far less, and comes with the deadline attached. That is the whole trade-off in one sentence: cheaper cycles, but the position has to be right before the long call runs out.
Shorter-dated options behave differently again for sellers, which LEAPS vs short-dated options covers, and the map of strategies past the wheel shows where each one sits.
Which fits you?
- "I want to own this company for years." Shares. The deadline is the one risk you cannot manage, and dividends compound while you wait.
- "I believe in the next year or two and I can't fund 100 shares." A deep in-the-money LEAPS. Less time value to lose, and it tracks the stock more closely.
- "I want to sell calls every month." Shares if you can afford them; a PMCC if you can't.
- "I want the cheapest way to be bullish." An out-of-the-money LEAPS — and plan for it to be worth nothing. Size it as money you can lose outright, not as a share position.
- "I want the dividend." Shares only. There is no version of an option that pays it.
In Canada, buying a long-dated call is normally allowed in a TFSA or RRSP once your broker grants options permission, but dividends and option gains are treated differently in each account type, so ask your broker or a tax professional which account this belongs in.
Questions
Is buying a LEAPS better than buying shares?
It is cheaper and it expires. If the stock does what you expect inside the option's life, the call turns a smaller amount of money into a similar gain. If the stock takes longer, the shares survive and the call doesn't.
Do LEAPS pay dividends?
No. Only shareholders are paid. The expected dividends are already subtracted from the call's price, which is one reason a call on a high-dividend stock looks cheap.
How deep in the money should a LEAPS be?
Deeper means more money down, less time value to lose, and movement closer to the stock's own. Shallower means a cheaper ticket and a bigger chance of ending worthless. Pick by which of those two you can live with.
What happens if the stock drops and my LEAPS is underwater?
It keeps whatever time value is left and you can sell it, roll it further out, or hold. But the clock keeps running, and if the stock is below your strike at expiry the option is worth nothing — the loss is the full premium.
Can I sell covered calls against a LEAPS instead of shares?
Yes, and that trade has a name: a poor man's covered call. Your short call is covered by the long call rather than by stock, which most brokers treat as a spread and most registered accounts don't allow.
The Options Wheel System · for StructureX members
Learn the whole wheel, step by step. Use it for life.
44 plain-English modules take you from zero to running the wheel: covered calls, cash-secured puts, assignment, rolling, the math and the risk rules. A scored quiz after every part. Members of StructureX Foundations, my 50-lesson course, add it in one click, with the AI Research Desk.
See What’s Inside the Course $34.99 a month · Cancel anytimeFollow along