LEAPS
A LEAP (long-term equity anticipation security, a US exchange trademark now used loosely for any option a year or more out) is a single bought call with a distant expiry, usually struck well in the money. The holder pays once and cannot lose more than that premium plus commission. What the holder gives up is the dividends, the vote and the time value in the premium, which is gone by expiry whatever the share does. It is designed to give most of a shareholding's exposure for a year or two while committing only part of the cash. On this page a Rolls-Royce June 2028 call costs £4,728.90 against £15,477.00 for 1,000 shares.
Those three numbers carry the whole trade-off on this page: cash kept back from the shares, the daily rent for that, and the ceiling on the loss.
The page assumes the reader has met the long call, which prices a four-month BP call, and the Greeks. Rolls-Royce is used as a model underlying; this is not a view on Rolls-Royce.
Which strike: four June 2028 calls, from deep to shallow in the money
A LEAP buyer is choosing how much of the premium to pay as intrinsic value, which a deep strike is mostly made of and which does not decay, and how much as time value, which does. The four strikes below sit between 240p and 540p in the money.
Going deeper buys delta with intrinsic value. The 1,000 call carries only 78.00p of time value, £1.16 a day, and behaves like 919 shares, but it ties up £6,181.40 and keeps back only £9,295.60. The 1,300 call keeps back £11,378.10 and costs £2.53 a day, with the most vega of the four: £61.73 a volatility point, so a fall in implied volatility hurts it most. The worked example takes the 1,200 call: a delta of 834, time value of 132.75p (8.6% of the share price), and 30.6% of the cost of the shares, keeping back £10,748.10.
Which expiry: one year, eighteen months or two years, and whether the series exists
ICE's contract page for Rolls-Royce options says serial months run out to two years for Target Group options, with longer dates only through ICE Block, the exchange's wholesale facility. Other stock options list serial months out to one year. We could not confirm whether Rolls-Royce is in the Target Group (checked 26 September 2026); if it is not, the June 2028 call in the worked example would not be on the order book, and the longest screen series would be about a year out.
Rolls-Royce is among the 22 UK shares that also have a mini option, 8RR, covering 100 shares, but the minis list only the next three months and the following three quarterly expiries, so the longest mini on 14 August 2026 was June 2027. A mini June 2027 1,200 call would cost about £404.20 a contract: 402.50p a share on 100 shares, plus a £1.70 commission used as a placeholder because no mini rate is published. It is a one-year call, not a two-year LEAP, and whether a broker offers it and quotes a two-way price has to be checked (contract sizes).
Why not buy short-dated calls and keep replacing them? A 90-day 1,390 call, with a delta of 795 shares, close to the LEAP's, costs 191.25p (model 191.20p) and carries 41.25p of time value: £4.58 a day against the LEAP's £1.98. Covering all 672 days with such calls, at an unchanged share price and volatility, would cost £3,080.00 of time value, 2.32 times the LEAP's £1,327.50. It would also buy each call at whatever volatility the market offered on the day. The LEAP fixes one volatility for the whole period instead, which is why its vega, £51.65, is 2.38 times the 90-day call's £21.72.
The worked example: a June 2028 1,200 call on Rolls-Royce
The model gives the call a 39.7% probability of finishing above the breakeven, 29.0% of expiring at or below 1,200p and losing the whole premium (so 71.0% of finishing in the money), and 19.1% of being worth twice its cost at expiry, which needs Rolls-Royce at 2,145.50p. These are model probabilities (risk-neutral, lognormal, IV 30%, dividends deducted from the share price), not forecasts.
Costs. Commission is £2.80 for the round trip. The larger cost on a series this far out is the bid-ask spread, which the fills above leave out: at half the quoted width on each trade, a 5p-wide quote costs £25.00 each way, £50.00 in all or 3.8% of the time value bought, and a 10p-wide quote £100.00, 7.5%. No SDRT is charged in normal ICE option dealing; 0.5% of the strike, £60.00, is due only if the call is exercised and the shares are delivered (who pays SDRT).
The deep call's time value runs off at close to a straight line, about £1.98 a day, because most of its premium is intrinsic value that cannot decay. The call just out of the money shows the familiar curve, slow at first and steep at the end. The small steps up in April and August 2027 and April 2028 are dividends leaving the picture: holding the share at 1,540p means that once an ex-date has passed, the calls no longer carry a discount for a payment their holder would not have received. With the share unchanged, £708.22 of time value is still in the 1,200 call with 365 days left and £98.13 with 91 days left: the reason the plan sells with a year to go is not a sudden acceleration but that a year of time value is still there for a buyer to pay for.
Contract and access. The standard ICE Rolls-Royce option covers 1,000 shares and is priced in pence, with a minimum move of 0.25p, which is £2.50 on a contract; it is exercisable by 18:30 London time on any business day, with delivery two business days later. Buying the call is paid for in full, so a cash account at a broker such as IBKR can hold it; a roll entered as one two-leg order, and the calls later written against a LEAP on the poor man's covered call, need a margin account (accounts and permissions). Brokers offering ICE options are compared on the broker page.
Open this worked example in the strategy builder. The link carries all three assumed dividends and solves the volatility from the 472.75p fill, which gives back the page's 30%; the builder values the call as a European option, so its Greeks differ a little from the tree values here.
The LEAP against 1,000 shares: payoff at expiry, at purchase and with a year left
Above the strike the two lines run parallel: the shareholder ends a fixed £671.24 ahead before tax, made up of £1,327.50 of time value, £160.00 of dividends and £2.80 of commission on the option, offset by the £77.00 of stamp duty reserve tax a share buyer pays and the £742.06 the unspent cash earns. Below the strike the LEAP's loss stops at £4,728.90; at 900p the shareholder is £6,317.00 down. The dashed and dotted LEAP curves sit above its expiry line by whatever time value is left at that date, which is why selling before expiry recovers more than the hockey-stick shape suggests.
£4,728.90 or £15,477.00: the cash kept back, the dividends and the interest, on one tax basis
The case for a LEAP rests on what the £10,748.10 not spent on shares can earn. Interest and dividends are taxed differently, so the table puts both on the same footing. It assumes the cash earns Bank Rate, 3.75%, as simple interest for the 672 days, as a stand-in for a savings rate, and that the three dividends are paid as assumed.
For a higher-rate taxpayer with both allowances used, the fixed gap above the strike widens to £920.51, because the interest the LEAP route relies on loses more to tax (40% to 42%) than the dividends it gives up (35.75%). The cash kept back need not sit in a taxable account: no option can be held in an ISA, but the £10,748.10 can, and interest inside an ISA is not taxed (wrappers).
Rolls-Royce's dividends, and why early exercise does not pay on this call
The three assumed dividends, 16.0p in all, lower the call's value: without them it would be 485.53p, £127.53 a contract more. An American call can be exercised the evening before an ex-date to collect the dividend, but on this call the right is worth almost nothing: 0.06p of the 472.78p (the European value is 472.71p). The reason is the interest on the strike. Exercising early means paying £12,000 for the shares months before expiry; on the last ex-date, 20 April 2028, the interest on 1,200p for the remaining 58 days is 7.15p a share, more than the 5.0p dividend.
Exercising loses money at both prices even for an options intermediary with SDRT relief, and a retail holder would also pay 0.5% of the £12,000 strike, £60.00. A deep European call can be worth less than its intrinsic value when the dividends to come exceed the interest on the strike; an American call cannot, because it can be exercised, and on Rolls-Royce's small dividends the question does not arise. The general test, and the November BP case where it does pass, are on the assignment page. A rights issue, demerger or special dividend is handled by ICE adjusting the contract rather than by the holder taking up an entitlement (corporate actions).
Greeks over twenty-two months: vega and rho are the large numbers
Greeks are taken from the same tree as the values. The one-standard-deviation prices are 1,540p × e±0.30√(672/365), moves over the whole life applied at once. The mark-to-model row is before the closing commission.
Theta starts at £1.98 a day and is still only £2.33 after the first year: a call this deep has little time value near the money to lose quickly. Vega is the number that sets this structure apart from a short-dated call. At £51.65 a point, a rise in volatility from 30% to 38% on the day of purchase would have made the same call £439.82 dearer (516.76p), and a fall to 22% would have made it £377.69 cheaper (435.01p). The model's twelve-month range for Rolls-Royce volatility, 26% to 46% (an assumption for this page, not market data), puts 30% at an IV rank of 20, in the low band of the methods page's IV bands.
A year later, volatility and time together. With Rolls-Royce unchanged on 17 June 2027, time alone takes the call from 472.78p to 410.82p, a loss of £619.54 a contract. If volatility has also slipped to 22%, the call is worth 387.43p and the loss is £853.50. The volatility part of that, £233.96, is smaller than the £377.69 the same fall would have cost on the first day, because vega has shrunk to £33.85 a point by then. Adding the entry-day vega figure to the year's decay would overstate the loss.
Rho is £147.84 per percentage point: the LEAP defers a £12,000 payment for almost two years, so its value falls when interest rates fall. Two quarter-point cuts in Bank Rate would take about £73.92 off the call, a small figure next to the £742.06 of interest the cash kept back earns at today's rate, and one that moves the same way.
What the worked plan did as Rolls-Royce moved
The plan sets three conventions at purchase. It rolls up when the call's delta reaches 0.90, selling it and buying the June 2028 strike whose delta is nearest 0.80, because above 0.90 the position is mostly intrinsic value that the shares themselves would provide. It has a stop that closes the call once its value halves, at 236.375p. And it closes with 365 days left, on Thursday 17 June 2027, while a year of time value can still be sold. The methods page says where conventions like these come from and what is known about them. Branches A and C follow a straight line in the share price with volatility unchanged, dated on the first trading day a convention fires; the lines are a modelling device, not a forecast. Positions still open in the table are valued at the model price, before the closing commission.
The roll-up in Branch A is the convention with the biggest consequence, and most of it is tax. Selling the 1,200 call is a disposal in 2026/27 even though the view on Rolls-Royce has not changed, and the new 1,400 call starts a fresh cost. The mechanics of rolling are on the rolling page; the tax of this roll is in the next section.
UK tax across three tax years: a roll is a disposal, and time held changes nothing
The UK has no lower rate for a long holding: an option held for 672 days is taxed like one held for 67, at 18% within the basic rate band or 24% above it (GOV.UK CGT rates). The CGT figures take the £3,000 annual exempt amount as already used on other gains. What a multi-year LEAP does change is which tax year each result falls in.
Every sale and lapse goes in the SA108 section for other property, assets and gains; the SA108 page explains which boxes. The trap specific to a long-dated position is the one in the third row: a gain taken on a roll and a loss on the replacement can land in different tax years, and a later year's loss does not reach back (across 5 April; tax of a roll).
Selling the June 2028 1,550 put instead, and why the American put is dearer
A two-year written put is sometimes offered as another way to be long a share. On the same chain, the June 2028 1,550 put would bring in 212.50p (model 212.42p), £2,123.60 after commission.
The written put holds £15,500 of cash against the obligation, about what the shares cost, has less than half their delta and caps the gain at the credit. If it is later bought back, the cost is set against the 2026/27 grant (TCGA 1992 s148; CG55545), and if it is assigned the premium reduces the cost of the shares (written options).
Parity, and the put's early-exercise value. For European options, a call less a put at the same strike and expiry equals the share price less the present value of the dividends and of the strike. At 1,550: 280.59p − 202.54p = 78.05p, and 1,540p − 15.35p − 1,446.60p = 78.05p. The American put is worth 212.42p, 9.88p more than the European 202.54p, because a put holder deep in the money may exercise early to receive the 1,550p strike and earn interest on it, and here the interest on the strike far outweighs Rolls-Royce's dividends. Pricing the put as European would understate the credit by about £98.81 a contract (£2,025.41 at the European value against £2,124.21 at the American, both before commission). The American 1,550 call, by contrast, is worth 280.72p, barely more than its European value, for the same reason the 1,200 call's early-exercise right is worth only 0.06p. So a long call plus a written put at 1,550, the synthetic long position, costs 68.30p as American options rather than the 78.05p of the European pair (put-call parity; American against European value; early put assignment).
An ICE LEAP, an ICE mini or a US LEAP: what each changes
The call has a delta of 83 shares at purchase. Converting the dollar gain at the purchase-date rate would give £1,392.43; because sterling fell from $1.3559 to the illustrative $1.30 over the ten months, the chargeable gain is £148.70 higher (CG78310; two dates, two rates). The purchase rate is the cross of the ECB's reference rates for 17 August 2026. A US LEAP brings two years of currency exposure; the route, the W-8BEN and the firms that offer it are covered on the US options page.