Learn How to Trade Options (Collection)

21. Stock Substitutes

In this chapter, you explore the use of options as a substitute for stock. With the right choice of an option position, you can closely replicate the price movement of an underlying stock or ETF. The main advantage of these stock substitutes is that they are significantly cheaper than owning the actual stock or ETF. There are also some disadvantages to stock substitutes that will be discussed.

Matching the Stock Delta

From Chapter 4, “The Greeks,” you recognize that long stock has a delta = 1.0. Thus, any combination of options that has a delta = 1.0 will simulate the price movement of the underlying stock. In particular, the combination of an at-the-money long call and short put typically has a net delta close to 1.

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