I was looking at AAPL $40 Call Options for Jan 2023, and I noticed that the break-even price is +0.35% of current.

AAPL is trading at around 110$ at the moment. This means I could increase my exposure to Apple by (110/(110-40)) = 57%, for just 0.35*110/(110-40) = 0.55% interest over 2+ years.

Many platforms charge 5+% for margin, and yet you can get it for only 0.25% by buying low-strike Calls.

This seems too good to be true. What am I missing?

1 Answer 1


What you are describing is called the "Stock Replacement Strategy" where you buy a high delta deep in-the-money call LEAP expiring as far out as possible instead of 100 shares. Because the call is deep ITM, if the implied volatility is reasonable, you'll pay minimal time premium. LEAPs have very little time decay (theta) for many months which means that the cost of ownership is low in the early months.

On an expiration basis, the call LEAP has less catastrophic risk than share ownership in the amount of current stock price less the cost of the LEAP. Below the strike price, the shareholder continues to lose whereas the call owner loses nothing more.

Prior to expiration, the LEAP has even less risk because as the stock drops, the delta of the call will drop and that means that the call LEAP will lose less than the stock for each dollar of drop in the underlying. How much? Not much initially. It depends on when the drop occurs (near or long before expiration) and what the implied volatility is at that later date (increase in IV increases the value of an option). In the case of a very deep ITM $40 strike on a $110 stock, this won't amount to much unless it really hits the fan.

An advantage for the call LEAP is that if the underlying rises nicely, you can roll your call up, pulling money off the table and lowering your risk level, something you can't do with long stock. You'll give up some delta but in return you'll repatriate some principal.

The disadvantages of the LEAP are:

  • The amount of time premium paid

  • LEAPS tend to have wide bid/ask spreads so adjustments can be more costly. Try to buy them at the midpoint or better.

  • The share owner receives the dividend and that is additional lag which you haven't included in your calculations (share price is reduced by the amount of the dividend when the stock goes ex-dividend).

If you follow all of this then the next leap, so to speak, is an income strategy anecdotally called the Poor Man's Covered Call where you use the LEAP as a surrogate for the stock and you write nearer expiration calls against it. Technically, it's a diagonal spread.

  • Wow thanks that was super informative! I guess the lack of dividend is what makes this appear so good; and taking another look the bid/ask spread is at least a few percent...
    – Gill Bates
    Oct 30, 2020 at 18:18
  • 1
    You're welcome. Yes, your calculation was one the low side and I surmised that you didn't used the respective ask prices. The strategy is still a good one because for a modest time premium, you can lay off a lot of risk. Oct 30, 2020 at 18:35

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