Stock Replacement Strategy

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DEFINITION of 'Stock Replacement Strategy'

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. Traders 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.

INVESTOPEDIA EXPLAINS 'Stock Replacement Strategy'

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.

RELATED TERMS
  1. Option

    A financial derivative that represents a contract sold by one ...
  2. Delta

    The ratio comparing the change in the price of the underlying ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Derivative

    A security whose price is dependent upon or derived from one ...
  5. Futures

    A financial contract obligating the buyer to purchase an asset ...
  6. Underlying

    1. In derivatives, the security that must be delivered when a ...
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