STOCK REPLACEMENT

Options are an important derivative class which allow traders to take positions and generate profits with limited amount of risks. Traders going long on options have to pay a premium whereas those going short/ writing the option charge premium. Apart from this there are multiple option trading strategies which enable traders to further reduce their downside risk and increase the chances of profit making based on different scenarios. Stock replacement is a trading strategy that substitutes deep in the money call options for outright shares of stock. The initial cost is lower but the holder is able to participate in the gains of the underlying stock, almost dollar for dollar. The main goal of a stock replacement strategy is to participate in the gains of a stock with less overall cost. Because it uses less capital to begin, the investor has the choice to either free up capital for hedging or for other investments or leverage a greater number of shares. Thus the investor has the choice to use the additional capital to either reduce risk or accept more in anticipation of greater potential gain.