When you're looking at out-of-the-money LEAP call options, the question isn't really about finding a single "best" stock. It's about understanding the mechanics of how OTM LEAPs work, what makes them risky, and how to evaluate whether a particular stock's volatility profile and business trajectory justify the premium you're paying. OTM LEAPs are pure time and volatility bets—they have no intrinsic value, so you're paying entirely for the possibility of future upside. That makes strike selection, expiration timing, and understanding the Greeks essential to any LEAP strategy.
Key takeaways
- OTM LEAP calls consist entirely of extrinsic value, meaning you're paying for time and implied volatility rather than any current stock ownership equivalent
- Delta on OTM LEAPs typically ranges from 0.30 to 0.50, so the option moves only 30-50% as much as the underlying stock
- Theta decay accelerates as expiration approaches, making longer expirations (18-24 months) more forgiving than shorter ones
- High implied volatility percentile can inflate premiums significantly, so checking IV rank relative to historical levels helps assess whether you're overpaying
- NVDA and other high-growth tech stocks offer liquid LEAP markets but carry substantial volatility risk
What makes OTM LEAP calls different from ITM LEAPs?
The difference comes down to intrinsic versus extrinsic value. An in-the-money LEAP has intrinsic value—it's already profitable if you exercised it today. An out-of-the-money LEAP has none. You're buying hope, not ownership.
Deep ITM LEAPs behave like stock substitutes. They have high delta (0.70 to 0.90), low theta decay, and mostly intrinsic value. OTM LEAPs are the opposite: low delta (0.30 to 0.50), high theta, and composed entirely of time premium. That makes them cheaper upfront but far more speculative.
Delta: A measure of how much an option's price changes when the underlying stock moves $1. A delta of 0.40 means the option gains roughly $0.40 for every $1 the stock rises. Lower delta means less sensitivity to stock movement.
If you're using LEAPs as part of a covered call strategy like the poor man's covered call (PMCC), you want high delta and low extrinsic value to replicate stock ownership. If you're speculating on big upside, OTM LEAPs give you more leverage with less capital—but also more ways to lose.
How do you evaluate NVDA for OTM LEAP calls?
Start with the business case. NVDA operates in high-growth sectors like AI infrastructure, data center GPUs, and gaming. That creates both opportunity and volatility. If you believe the company will continue gaining market share in AI chips over the next two years, an OTM LEAP gives you leveraged exposure without tying up the capital required to buy shares outright.
Next, look at implied volatility. Options pricing reflects the market's expectation of future volatility. If NVDA's implied volatility is at the 80th percentile compared to its own history, premiums are expensive. You're paying more for the same strike and expiration than you would when IV is lower. Check the NVDA research page to see current volatility metrics and compare them to historical ranges.
Technical support levels matter too. If NVDA is trading at $120 and you're considering a $140 strike LEAP expiring in January 2026, you need the stock to move 16.7% just to reach your strike. Add the premium you paid, and your breakeven might be $155 or higher. Identify key resistance levels, moving averages, and prior consolidation zones to assess whether that kind of move is realistic within your timeframe.
What role do the Greeks play in OTM LEAP selection?
Delta tells you how much your option moves relative to the stock. An OTM LEAP with a delta of 0.35 gains $0.35 for every $1 the stock rises. That's less responsive than stock ownership, but it also costs a fraction of the price. You're trading capital efficiency for stock-like movement.
Gamma measures how fast delta changes as the stock moves. OTM options have lower gamma than at-the-money options, so your delta won't accelerate much if the stock rallies. That's a disadvantage if you want rapid gains, but it also means your delta won't collapse as quickly if the stock pulls back.
Theta: The rate at which an option loses value due to time passing, often expressed as dollars lost per day. OTM options are all extrinsic value, so theta decay steadily erodes your position even if the stock doesn't move.
Theta is the enemy of all option buyers, but it's especially brutal for OTM positions. If you buy an OTM LEAP with 18 months to expiration, theta might be -$0.05 per day initially. That seems small, but it compounds. Over six months, you'll lose $9 in time value even if the stock stays flat. As expiration approaches, theta accelerates. That's why longer expirations give you more room for the thesis to play out.
Vega measures sensitivity to changes in implied volatility. If you buy an OTM LEAP when IV is at the 30th percentile and it spikes to the 70th percentile, your option gains value even if the stock hasn't moved. But if you buy when IV is already elevated and it contracts, you lose money on two fronts: time decay and falling volatility. Always check IV percentile before entering a position. Tools like the Rallies screener can help filter for stocks with favorable volatility conditions.
How do you pick the right strike price and expiration?
Strike selection is a tradeoff between probability and leverage. A strike closer to the current stock price costs more but has a higher chance of finishing in the money. A strike further out is cheaper but requires a bigger move to profit.
One approach: look at historical volatility and project a reasonable range for the stock over your timeframe. If NVDA's annual volatility is 50%, a one-standard-deviation move over the next year might put the stock between $90 and $180 (using a hypothetical $130 starting point). Picking a strike within that range gives you a statistically plausible target. Picking one outside it means you're betting on an outlier event.
Expiration should give your thesis time to develop. If you expect a catalyst like a product launch or earnings surprise within six months, a 12-month LEAP gives you buffer. If your thesis is multi-year growth, 18-24 months makes more sense. Just remember: the longer the expiration, the more premium you pay, but the less theta hurts you in the early months.
Compare the premium to the stock's expected move. If a $140 strike LEAP costs $15 and NVDA is at $120, you need the stock to hit $155 to break even. That's a 29% gain. Ask yourself: is a 29% move over the next 18 months realistic given the company's growth rate, sector trends, and macroeconomic backdrop? If the answer is "maybe," the risk-reward might not justify the cost.
What are the risks specific to OTM LEAP calls?
Total loss is the big one. If the stock doesn't reach your strike by expiration, your LEAP expires worthless. You lose 100% of the premium you paid. That's different from stock ownership, where you still have equity even if the price drops.
Time decay is relentless. Even if you're right about direction, being early can cost you. If you buy an OTM LEAP and the stock rallies six months later than you expected, theta may have already eroded much of your position's value. Timing matters more with options than with stock.
Volatility collapse is another risk. If you enter when implied volatility is high and it drops, your option loses value even if the stock moves in your favor. This is especially common after earnings announcements or major events—IV spikes beforehand, then crashes afterward. If you bought right before the event, you might be holding a position that's worth less despite the stock moving your way.
IV Percentile: A measure of where current implied volatility ranks relative to its range over the past year. An IV percentile of 80 means current volatility is higher than 80% of readings over the past 12 months, suggesting premiums are expensive.
Assignment risk doesn't apply to long LEAP holders—you can't be assigned on a position you own. But liquidity risk does. If you need to exit early and the bid-ask spread is wide, you'll pay a hefty cost to close the position. Check average daily volume on the specific strike and expiration before entering. NVDA typically has liquid LEAP markets, but less widely traded stocks may not.
How do you compare historical IV to current levels?
Implied volatility rank (IV rank) or IV percentile tells you whether current option premiums are cheap or expensive relative to history. If NVDA's IV percentile is at 25, current volatility is lower than 75% of the past year's readings. That's a better time to buy options. If it's at 90, you're paying top dollar for premium.
Historical volatility (HV) measures actual past price movement. Comparing IV to HV helps you assess whether the market is overpricing or underpricing future movement. If IV is 60% but HV over the past 90 days was only 40%, the market expects more volatility going forward than the stock has recently shown. That could mean premiums are inflated, or it could signal an upcoming catalyst.
You can track these metrics over time using Rallies AI Research Assistant, which pulls historical volatility data and helps you spot patterns in IV behavior around earnings or product announcements.
What catalysts make OTM LEAPs more attractive?
Product cycles, earnings beats, regulatory approvals, and sector rotation all create conditions where OTM LEAPs can outperform. If you expect NVDA to release a next-generation GPU architecture that significantly outperforms competitors, an OTM LEAP gives you leveraged exposure to that event.
Sector tailwinds matter too. If AI infrastructure spending is accelerating across the industry, NVDA benefits as a major supplier. A rising tide in the sector can lift individual stocks, making OTM strikes more achievable. Conversely, if the sector faces headwinds—regulatory scrutiny, supply chain disruptions, or slowing enterprise IT budgets—even strong individual companies may struggle to hit stretched price targets.
Earnings reports are double-edged. A strong report can spike the stock and your LEAP value overnight. But IV typically drops hard after earnings, which can offset stock gains if the move isn't large enough. If you're holding through earnings, factor in the likely IV crush when assessing risk-reward. For more on thematic sector research, explore the Rallies thematic portfolios.
How do you manage an OTM LEAP position over time?
Set milestones. If your thesis was that NVDA would hit $150 within 12 months and it gets there in six, decide in advance whether you'll take profits or hold for further upside. Having a plan prevents emotional decisions when the position moves.
Monitor theta decay. As you approach six months to expiration, theta accelerates. If your LEAP is still OTM and the stock hasn't moved as expected, you face a choice: roll the position to a later expiration, accept the loss, or hold and hope for a late rally. Rolling costs money—you're buying more time—but it can make sense if the thesis remains intact and you just need more runway.
Adjust for changes in IV. If implied volatility spikes due to market uncertainty or company-specific news, that's often a good time to consider selling, especially if your LEAP has appreciated significantly. Elevated IV won't last forever, and when it contracts, it takes some of your gains with it.
Track your breakeven. As time passes and the stock moves, your breakeven point shifts. Recalculate regularly to understand how much further the stock needs to move for you to be profitable at expiration. This keeps you honest about whether the position still makes sense. You can track all your positions, including options, using the Rallies portfolio tracker.
Try it yourself
Want to run this kind of analysis on your own? Copy any of these prompts and paste them into the Rallies AI Research Assistant:
- I want to understand how to evaluate NVDA for long-term LEAP call options — what should I look for in terms of volatility trends, technical support levels, and upcoming catalysts that might make OTM strikes worth the premium? Walk me through how to pick a strike price and expiration that balances risk and potential upside for a bullish multi-year thesis.
- What is the best stock to buy a OTM Leap call?
- Show me a comparison of NVDA's implied volatility percentile over the past six months and explain how that affects LEAP pricing. Include specific strikes and expirations with current premiums, and calculate breakeven prices for a $140 strike expiring in 18 months.
Frequently asked questions
What is the best stock to buy an OTM LEAP call on?
There's no single best stock—it depends on your thesis, risk tolerance, and timeframe. High-growth stocks with liquid options markets and clear catalysts make better candidates. NVDA, for example, offers deep LEAP markets and exposure to AI infrastructure growth, but that comes with substantial volatility. The best fit is a stock where you have strong conviction in multi-year upside and the volatility profile supports reasonable premium costs.
How far out of the money should a LEAP call be?
It depends on your risk appetite and target return. Strikes 10-20% OTM balance affordability with a realistic chance of finishing in the money. Strikes 30-50% OTM are cheaper but require much larger moves to profit. Check historical volatility to gauge whether your target strike is within a statistically probable range over your expiration timeline.
Is it better to buy LEAP calls when implied volatility is high or low?
Low IV is better for buying options. When implied volatility is low, premiums are cheaper, so you pay less for the same exposure. If IV later rises, your option gains value from both stock movement and increasing volatility. Buying when IV is elevated means you're paying more upfront and risk losing value if volatility contracts, even if the stock moves your way.
How much of a portfolio should be allocated to OTM LEAP calls?
OTM LEAPs are speculative and carry high risk of total loss, so most risk management frameworks suggest limiting them to 5-10% of a portfolio at most. The exact allocation depends on your overall risk tolerance, investment goals, and how much capital you're comfortable losing entirely. LEAPs should complement core holdings, not replace them.
Can you lose more than your initial investment with a LEAP call?
No. When you buy a LEAP call, your maximum loss is the premium you paid. You can't lose more than that, unlike short options or leveraged instruments where losses can exceed your initial investment. That's one advantage of long options: defined risk.
What happens to NVDA LEAP calls if the stock stays flat?
If NVDA doesn't move, your OTM LEAP loses value due to theta decay. The longer the stock stays flat, the more time value erodes. If the stock is still below your strike at expiration, the LEAP expires worthless. Even if the stock rises slightly but doesn't reach your breakeven price, you still lose money. Options require not just correct direction, but sufficient magnitude and timing.
Should you hold LEAP calls through expiration or sell early?
Most traders sell LEAPs before expiration to avoid accelerated theta decay in the final months. If your position is profitable and your thesis has played out, taking gains early preserves value and frees up capital. Holding to expiration makes sense only if you expect a significant move in the final weeks or if the option is already deep in the money and you plan to exercise it.
Bottom line
Evaluating what is the best stock to buy an OTM LEAP call on requires understanding the mechanics of extrinsic value, the Greeks, and implied volatility. NVDA and other high-growth stocks offer compelling LEAP opportunities, but they demand careful strike selection, expiration timing, and risk management. OTM LEAPs are tools for expressing high-conviction, long-term bullish views with defined risk—but they're not stock substitutes, and timing matters as much as direction.
For more strategies on using options in your portfolio, visit the Rallies options strategy hub.
Disclaimer: This article is for educational and informational purposes only. It does not constitute investment advice, financial advice, trading advice, or any other type of advice. Rallies.ai does not recommend that any security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decision, consult with a qualified financial advisor and conduct your own research.
Written by Gav Blaxberg, CEO of WOLF Financial and Co-Founder of Rallies.ai.
