Deep ITM LEAPS as SPY Stock Replacement

A deep in-the-money LEAPS call na long-dated option wey dey trade well above im strike price. Active traders dey hold am as stock replacement: one contract dey stand in for 100 shares, but e need only small part of the cash. LEAPS (Long-term Equity AnticiPation Security) na simply option wey get more than one year before e expire. “Deep in the money” mean say strike dey far below the current stock price. So, most of the option value na intrinsic value (real stock value wey match dollar for dollar), and e get high delta. This post dey follow one real SPY LEAPS call through im deep-ITM life, to show wetin the swap dey buy and wetin e cost.

The contract na SPY $600 call option wey dey expire January 16, 2026. We pick am up for early June 2025, when SPY don return above $600 and the call don already enter in the money. We follow am as e move toward expiry.

Wetin stock replacement mean

If you own 100 shares of S&P 500 ETF, you gain one dollar for every dollar wey the fund rise. Deep-ITM call on the same fund dey do almost the same thing, but e need much less money upfront. The connection na delta: how much the option dey move for every $1 move in the stock. One share get delta of exactly 1. When call delta dey near 0.9, e capture about 90 cents from every dollar wey the stock add, while e tie down only small part of the cash wey share position need. Na this difference between exposure and cash be the main attraction.

Delta dey climb toward 1

As SPY move further above the $600 strike during the second half of 2025, the call’s delta steadily climb toward the level of one share:

SELECT toStartOfWeek(date, 1) AS week,
       round(avg(delta), 3) AS delta
FROM global_markets.options_greeks
WHERE ticker = 'O:SPY260116C00600000' AND date BETWEEN '2025-06-02' AND '2026-01-13' AND implied_volatility > 0.02
GROUP BY week ORDER BY week

Delta start the period at 0.586 for early June and reach 0.962 by mid-January. Delta of 0.962 mean say the LEAPS move almost exactly like the stock. E dey close enough to one-for-one, so the holder feel almost the same daily profit and loss wey shareholder dey feel for every dollar move in SPY. The complete set of sensitivities behind that number na the option greeks.

The capital efficiency

The main reason for the swap na the cash wey e free up. Look the same inputs on three deep-in-the-money dates:

SELECT date,
       round(avg(underlying_close), 2) AS spy_close,
       round(avg(underlying_close) * 100, 0) AS shares_cost,
       round(avg(option_close), 2) AS leaps_price,
       round(avg(option_close) * 100, 0) AS leaps_cost,
       round(avg(underlying_close) / avg(option_close), 1) AS leverage_x,
       round(avg(delta), 3) AS delta
FROM global_markets.options_greeks
WHERE ticker = 'O:SPY260116C00600000' AND date IN ('2025-07-01', '2025-10-09', '2025-12-01') AND implied_volatility > 0.02
GROUP BY date ORDER BY date

For October, when SPY close at $671.96, 100 shares cost about $67,200. The LEAPS trade at $82.03 per share, so one contract for the same 100 shares cost about $8,200: roughly 8.2 times less capital for position wey carry delta of 0.897. Trader fit keep the SPY exposure and put the other about $59,000 for cash or Treasuries. The leverage multiple actually dey reduce as the call go deeper, from 12.7 times for July to 8 times for December. Deeper call cost more, so e get less leverage per dollar, even as im delta continue to rise.

Leverage, indexed

If you index SPY and the LEAPS to 100 for the start, the difference clear:

SELECT week,
       round(spy / first_value(spy) OVER w * 100, 1) AS spy_index,
       round(leaps / first_value(leaps) OVER w * 100, 1) AS leaps_index
FROM (
  SELECT toStartOfWeek(date, 1) AS week,
         avg(underlying_close) AS spy,
         avg(option_close) AS leaps
  FROM global_markets.options_greeks
  WHERE ticker = 'O:SPY260116C00600000' AND date BETWEEN '2025-06-02' AND '2026-01-13' AND implied_volatility > 0.02
  GROUP BY week
)
WINDOW w AS (ORDER BY week)
ORDER BY week

SPY finish the period near 116.6 on that scale, with gain in the mid-teens percentage range. The LEAPS, indexed the same way, reach 265.8, more than double. One contract turn mid-teens move in the fund into triple-digit percentage gain on the premium. Na the same leverage wey the low cash outlay imply, but here we dey measure am as return instead of price.

Why decay remain small

The usual problem people get with options na time decay. When option deep in the money, that concern mostly reduce. Almost all the premium for deep-ITM option na intrinsic value, and intrinsic value no dey decay. Na only the small extrinsic (time) part dey reduce as expiry dey near.

SELECT toStartOfMonth(date) AS month,
       round(avg((option_close - greatest(underlying_close - 600, 0)) / option_close) * 100, 1) AS extrinsic_pct,
       round(avg(theta), 3) AS theta
FROM global_markets.options_greeks
WHERE ticker = 'O:SPY260116C00600000' AND date BETWEEN '2025-06-02' AND '2026-01-13' AND implied_volatility > 0.02
GROUP BY month ORDER BY month

For early June, when SPY dey near the $600 strike, 92.7% of the premium na time value. By December, after the option enter deep in the money, e reduce to 3.6%. Only few dollars from the $84.49 December premium still be time value wey fit decay. Theta, meaning the dollars of value wey option lose each day, stay near -0.106 through most of the holding period. E only become steeper at -0.441 during the final month, as the remaining time value drain out. Stock-replacement trader fit close or roll the position well before that final-weeks increase, so e avoid the steep decay. How that curve dey behave throughout option life na separate topic: how the greeks change over time.

The trade-offs

The swap no be free. Three costs dey come with am:

1. No dividend. Shareholder dey collect SPY quarterly distribution; call holder no dey collect am. If you hold am for long time, that lost yield na real money.
2. Fixed expiry. Stock no dey expire, but LEAPS dey expire. To keep the exposure, you need roll into later-dated contract before the option expires, and pay fresh spread every time.
3. Wider spread. Options cost more to enter and exit than the underlying ETF. If roll price no good, e fit reduce the capital wey the strategy save.

Leverage fit work for both sides. The low upfront cost limit dollar loss to the premium, but sharp fall in SPY fit make the call lose value faster in percentage terms than the stock move. The same delta wey help the upside fit make downside loss sharper. This strategy suit trader wey want defined-risk, capital-efficient exposure and wey go actively manage the roll. E no suit shareholder wey want to buy and forget. The bearish version of the idea dey use puts instead: see buying and selling put options.

FAQ

Wetin be deep-ITM LEAPS stock-replacement strategy?

Na to hold one long-dated, deep in-the-money call instead of 100 shares of stock or ETF. The call delta, wey dey near 1, make am follow the shares closely while e tie down far less cash. Traders dey use am for leverage without margin loan, and the loss no fit pass the premium wey dem pay.

How much cheaper LEAPS be compared with buying 100 shares?

For this example, SPY $600 LEAPS cost about 8.2 times less than 100 shares for October: roughly $8,200 compared with $67,200 for the same 100-share exposure. The multiple dey reduce as the call go deeper in the money.

Deep-ITM LEAPS get plenty time decay?

Very small amount, until the final stage. When option deep in the money, the premium mostly na intrinsic value, and intrinsic value no dey decay. By December, this call carry only 3.6% time value, and im theta remain shallow until the final month before expiry.

Wetin be the disadvantages of replacing stock with LEAPS?

Three things: no dividend, fixed expiry wey force you to roll, and wider bid-ask spread than the underlying. Leverage also increase losses in percentage terms, although total loss still no fit pass the premium wey you pay.

Every price above come from stored query wey you fit run again on the Strasmore terminal.