Options trading is all about timing and strategy - but one question concerns almost all traders equally: Which term should I choose? Short-term options offer the lure of rapid time decay, while long-term contracts promise calm and stability. But which option really suits which goals, and where are the opportunities and risks? In this article, we take a closer look at long-dated options, known as LEAPS, and show how they compare to short-term contracts.
The „square root rule“ - price development of options
The so-called square root rule states that it takes about four times as long for the price of an option to double. Example: An ATM put option with a term of 90 days costs $16. According to the rule, an option with a term of 360 days would have a price of:
In practice, the situation is similar: An ATM put option on the SPY with 90 days to maturity is $16.7, while the same option with 362 days is $36.7. This corresponds to a factor of 2.17, i.e. slightly above the theoretical value. This deviation is due to factors such as volatility skew or term structure, but the square root rule still shows the basic trend correctly.
Time value decay and relative price development
Long-term options are relatively cheaper, similar to an annual subscription compared to a monthly subscription. For buyers, this is an advantage that allows them to invest in high-priced shares or ETFs even with small amounts. For sellers of options, long terms are less attractive as the time value decays more slowly.
A concrete example at SPY:
- 90-day ATM put: $16.7 → falls to $ 0 within the last 90 days
- 362-day ATM put: $36.7 → falls to $31.7 in 90 days
Although 90 days elapse in both cases, the short-dated option loses three times as much value. For this reason, sellers prefer shorter terms - this is where time value can be „harvested“ most efficiently.
Long-running options (LEAPS) and gamma
Long-dated options, known as LEAPS, have a decisive advantage despite their slower time value decay: they react much more slowly to price movements because their gamma is lower.
Example:
Gamma runtime
90 DTE -0.91
360 DTE -0.40
This means that short-term options react strongly to price movements, while LEAPS remain calmer. In turbulent market phases - such as crashes - this inertia can help to cushion losses. Long-term options are therefore more robust and bring calm to the portfolio.
Strategic considerations for retail
Long-dated options are less suitable for strategies that rely on rapid time value decay. Those who, for example 0DTE options hoping that they will expire worthless does not achieve the same effect with LEAPS - the reduction in fair value is very slow at first.
For this reason, small profit targets (take profit) are usually set for long-dated options, e.g. between 15-30 %. As soon as the target is reached, the position is closed and a new option is sold. This keeps the portfolio stable, while the risk is limited by the low gamma. If you stay in a position too long, you run the risk of the gamma risk increasing again - similar to short-term options.
Selection of underlying, delta and premium
Liquid and large underlyings, such as ETFs like SPY or IWM, are suitable for long-term strategies. As a rule, the chosen term is around 365 calendar days; smaller deviations are unproblematic.
The option is often selected according to delta - we prefer delta 30 options. Reason: Long-dated options have a high vega, i.e. a strong dependence on volatility. The normalized vega shows how strongly an option reacts to volatility fluctuations in percentage terms. Example: A 440 put (delta 5, 348 DTE) has a normalized vega of 14 %, a 635 put (delta 30) only 8 %. This means that options closer to the money react less strongly to changes in volatility.
Stop loss, take profit and risk management
Long-dated options require adjusted stop loss and take profit levels. Small targets allow positions to be closed and resold quickly, while large targets take a long time. Backtests from 2019-2025 showed that a combination of 15 % take profit and 50 % stop loss is most effective: high hit rate (86 %) with low maximum drawdown.
| Take profit | Stop | Total Return | Expected value | Number of trades | Max drawdown |
|---|---|---|---|---|---|
| 15 | 50 | $21.305 | 125 | 170 | 2,80% |
| 30 | 50 | $19.354 | 215 | 90 | 3,00% |
| 50 | 50 | $15.881 | 294 | 54 | 4,50% |
| 80 | 50 | $5.038 | 153 | 33 | 5,50% |
| 15 | 100 | $16.719 | 120 | 139 | 4,10% |
| 30 | 100 | $15.734 | 216 | 73 | 3,90% |
| 50 | 100 | $16.295 | 339 | 48 | 4,20% |
| 80 | 100 | $8.652 | 333 | 26 | 3,80% |
| 15 | 150 | $11.870 | 93 | 127 | 5,10% |
| 30 | 150 | $16.867 | 242 | 69 | 3,60% |
| 50 | 150 | $14.756 | 360 | 41 | 4,60% |
| 80 | 150 | $18.181 | 790 | 23 | 3,40% |
The risk of a single trade should never exceed 2-3 % of the portfolio. For smaller accounts, alternatives such as IWM puts or sector ETFs, which are less leveraged, or smaller deltas are suitable.
Opportunities and restrictions
Long-dated options offer an interesting opportunity to build up stable positions and profit from the market at the same time. They are less sensitive to short-term fluctuations, have a slower theta and allow controlled risk management.
At the same time, they are not a panacea: the strategy has benefited greatly from the bull market in recent years. Even conservative trades can come under pressure during prolonged downturns or a sharp rise in volatility. We therefore recommend testing the strategy in paper trading first before investing real capital.
Conclusion
Long-term options are a flexible tool for traders who want to take advantage of long-term movements with low gamma risk. If you properly adjust your stop loss, take profit and position size, you can benefit from a high hit rate and stability without putting too much strain on your portfolio. At the same time, a residual risk remains: losses can occur during crash phases or volatility spikes. The strategy is therefore particularly suitable for traders who observe the market over the long term and have understood the mechanics of LEAPS.
