Stock replacement strategy, as the name suggests, is a strategy to mimic the returns of trading stocks through derivatives. The strategy aims at profiting from a stock, without directly trading the stock. In stock replacement strategy, traders use options (especially deep in-the-money options) and futures on the stock. For example, traders can buy deep in-the-money options having delta close to 1, then a $1 rise in stock price will also cause a $1 rise for the option.

Advantages of stock replacement strategy:

• The strategy offers all benefits associated with trading (group of) stocks.
• Reduces costs associated with opening long positions and holding them.
• Offers more leverage, most money can be retained for hedging purposes.
• Offers low downside risk, with options traders having the option to do or not to do, and futures positions can easily be offset.
• Both simple and complex options trading strategies can be followed for getting custom results.

Disadvantages of stock replacement strategy:

• Needs good trading experience and skills to master the strategy.
• The strategy may fail, when the stock stays on (almost) the same price or moves sidewise with minimal volatility.
• Sometimes the costs of trading options can match or exceed those of trading stocks.

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