Deep in-the-money LEAPS as a Stock Substitute
Deep in-the-money LEAPS can be an effective and less expensive way to gain the principal advantages of outright stock ownership at a substantially reduced cost. The concept here is to purchase LEAPS whose deltas are close to one. This will always be LEAPS with strike prices far below the current price of the underlying stock. With deltas close to one the price of the LEAPS moves in lockstep with the price of the underlying stock. The cost of these LEAPS is usually 30% to 70% chaeper than the stock outright, thus giving additional discretion to the investor with his excess capital. With LEAPS, the expitation date is far away, thereby minimizing the effect of time decay and allowing sufficient amount of time for the price to rise. Remember the following if you are considering using this strategy: One, choose only long-dated LEAPS; Two, make sure the delta of the LEAPS option is near one; Three, remember LEAPS are options and they will eventually decay in value, so be careful! For an excellent extended discussion on the virtues of using LEAPS as a stock substitute, I can recommend this book, Get Rich with Options by Lee Lowell.
If you're interested in trend trading and using long-term options as a stock substitue,
The Stock Teacher
is an excellent website for your continued learning.
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