Stock Replacement Strategy

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Topic Author
Caduceus
Posts: 3527
Joined: Mon Sep 17, 2012 1:47 am

Stock Replacement Strategy

Post by Caduceus »

I am considering using deep in the money LEAPs call options to replace my stock holdings and to hold a combination of cash + options instead of stock itself. I thought of this because of two inter-connected reasons: I think the stock market is likely in a bubble, but also that it's very unlikely I will be able to predict how the stock market will behave in the near term.

Holding a combination of options + cash allows the portfolio to participate in the upside (through the deep in the money options) but the significant amount of cash left over serves essentially as a put should the stock market tank.

I did some rough calculations, and for every $100,000 I am currently invested in equities, I would need to buy $35,000 worth of deep in the money options that expire in January 2023, and I'd have $65,000 in cash that would be invested in extremely short-term cash-equivalents. I arrived at the $35,000 number per $100,000 in portfolio value by choosing a strike price 40% below the current market price, and assuming a delta of 1. Since the delta is going to be a little less than 1, my portfolio will be slightly less heavy in equities compared to a 100% stock portfolio, which is fine with me. (I'm not using it to lever my portfolio; I think of this strategy as being quite defensive.)

Since I would essentially be replicating a nearly 100% stock portfolio, the only difference here is that I have a significant cash position.

Has anyone ever tried something like this? What should I look out for?

My thinking is that I don't want to buy puts (expensive, no upside potential, and most of the potential downside already occupied by the premium paid), and that holding cash + DITM options would better achieve what I want to do.
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