It is an investment strategy that attempts to mimic the returns of a certain asset or group of assets by using a combination of different derivatives rather than buying the individual shares in the market. It is an options strategy that can be both simple and complex with the versatility to cater to the needs of amateur options traders and professional options traders. The main purpose of the Stock Replacement Strategy is the reduction of overall portfolio risk through the replacement of stocks using deep in the money call options and then using the remaining cash for strategic hedging as the trade progressesTraders will attempt to profit from the leverage found in options and futures because they can provide the same type of exposure to the underlying asset for a lower cost than if the trader were to buy the underlying assets outright.
An example of a stock replacement strategy would be to buy deep in-the-money options. The reason many traders use this strategy is because the delta of deep in-the-money options is close to 1, which means that the option will increase by $1 for every favorable $1 move in the underlying security. Buying in-the-money options allows a trader to have the same type of exposure to a stock for a lower cost than having to buy the shares. However, keep in mind that incorporating leverage creates a new set of risks, so it is a good idea to contact your financial advisor before incorporating a stock replacement strategy into your investment portfolio.