Authors: Abhinav Yadav
Abstract: Long-dated call options, marketed as Long-Term Equity Anticipation Securities (LEAPS), have been promoted to long-horizon investors as a low-cost way to multiply the long-run return of the stock market. The evidence offered for this claim rests on a particular measurement choice: prices are generated with the Black-Scholes-Merton model under fixed volatility, interest rate, and dividend assumptions, so every reported gain or loss is a change in a theoretical model price rather than a price a trader could actually have obtained. This paper argues that the central open question is not whether long-dated calls amplify index returns, which is almost mechanical, but whether the amplification survives once the pricing is made realistic: traded bid-ask quotes, stochastic volatility, volatility risk premia, transaction costs, and liquidity. The research is organized into three connected studies. The first constructs a realistic backtest of rolling two-year SPY call positions using market prices from 1996 through 2025, comparing results against the fixed-parameter model benchmark to isolate the model error. The second estimates how much of the long-run return is compensation for bearing volatility risk rather than equity risk, using a straddle-based pricing kernel under stochastic volatility. The third evaluates whether protective put structures, often recommended as insurance against expiration risk, retain their value once the cost of the hedge is priced at market levels. Together, the three studies address a gap that is both empirical and conceptual: the existing case for LEAPS has never been examined under the pricing assumptions under which the instruments are actually traded. The findings suggest that the fourfold amplification claim overstates realized returns by a wide margin once transaction costs and market pricing are incorporated, and that a substantial portion of the surviving premium compensates investors for bearing volatility risk rather than equity risk.
