Comments on: Stock Replacement Strategy – Introduction

By: Learn how to trade options with these strategies | Pro Option Trading Strategies

Tue, 01 Sep 2009 00:40:39 +0000

[...] Stock Replacement Strategy – Introduction – Over on TheStreet.com, Jim Cramer and his partner James Altucher have created a couple of video segments regarding options and a strategy Cramer calls stock replacement. I’ve searched the internet for what stock replacement is and how … addthis_url = ‘http%3A%2F%2Fwww.prooptiontradingstrategies.com%2Fhow-to-trade-options%2Flearn-how-to-trade-options-with-these-strategies’; addthis_title = ‘Learn+how+to+trade+options+with+these+strategies’; addthis_pub = ”; « Insuring your stocks with this option trading strategy [...]

By: Blog Income and Traffic - March 2008 | My Adventures into The Street

Blog Income and Traffic - March 2008 | My Adventures into The Street — Wed, 09 Apr 2008 19:41:45 +0000

[...] Stock Replacement Strategy – Introduction [...]

By: Revisiting the Stock Replacement Strategy Series | My Adventures into The Street

Thu, 28 Feb 2008 07:03:05 +0000

[...] Introduction [...]

By: Jorge

Jorge — Wed, 07 Nov 2007 11:44:36 +0000

Yeah, the delta’s close enough to 1. The DITM calls track about the same as the stock price so it’s a good enough approximation. Rolling up those DITM brings in extra cash as well so your scalping makes sense.

I cover his hedging in the other two parts of the strategy. I believe he’s shorting common at a 1:4 ratio while shorting calls at a 1:2 ratio. I’m curious as to when he shorts the calls though. I could only assume he shorts calls when it’s near expiration or close to a major event to take in extra premium from the calls being pumped up as he likes to call it.

It’s still a neat strategy. Only problem I’ve seen is that the homegamer may find the margin requirements to be huge and potentially out of their range.

By: Ben

Ben — Wed, 07 Nov 2007 04:26:10 +0000

You’ve done a good job of representing Cramer’s comments. However, if you go back and listen to his video again, you’ll notice he’s actually discussing two strategies.

The first strategy is the “stock replacement strategy”, which is nothing more then buying deep-in-the-money options. It’s a stock replacement strategy because of the deltas – if you buy it deep enough, then the delta will be at 1.00, and it will track the stock 1:1 – i.e., its now the stock proxy – the stock replacement.

What he does next, with shorting common stock at a ratio of 1:2, is a hedge – remember, he’s an expert on hedging! He’s protecting his downside. As with all hedges, it also impacts his upside profit potential. However, it does effectively hedge the position and protect it from a large drop – he makes reference to protecting it from a bad earnings report in the video – the protection is the hedge.

Of more interest, which he doesn’t say, the deep-in-the-money option now has no theta loss – it doesn’t decay for time. So there’s very little penalty for time. In addition, you aren’t paying for any time! Most options a few months out won’t really give you a delta of 1.0; they will give you 0.97 or something slightly less, which represents a 3% cost for time. Much better then the atm option with it’s 50% premium for time and IV!

One other item – you may have to buy the stock in order to get a fair price, as the market makers will set broader spreads as deeps get close to expiration; since they are so thinly traded, it’s hard to get a fair price. You can see this if you look at the deltas or IV. It will start pulling back from 1. To beat this scalp, you need to exercise the option to stock, then sell the stock, where you’ll get a fair price.