So...you want to buy a stock, but can't really afford it. Shares of AMZN are trading at $2,000. You blew most of your wad on those candy options you forgot to sell before Halloween; you only have a few hundred dollars left in your trading account.
Luckily, there's a thing called the stock replacement strategy. You can use options to create a structure that allows you to earn the same return you would get from owning the shares outright. However, it takes less cash to set up than buying the stock itself.
The strategy works by purchasing call options that are deep in-the-money. The goal is to acquire options that give you a delta approaching 1.0, meaning that, as the price of the underlying stock (AMZN in this case) rises 1%, the value of your options bet will also rise 1%. And the price for the options are significantly lower than the $2,000 you'd have to pay for a single share of AMZN.
Related or Semi-related Video
Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
Up Next
What is the difference between mutual funds and index funds? Mutual funds are professionally managed. Those investors trade shares and realize taxa...