← IntermediateLesson 17 · 4:09
Deep in-the-money call as a stock replacement
Summary
You can use a deep in-the-money call as a stand-in for 100 shares, knowing what you pay for time and what you give up. You can compare it dollar for dollar with the shares, and see how the same fall that costs the shares 20% can take 100% of the call, and far more if you buy several.
Key terms
- stock replacement
- Using a deep in-the-money call to stand in for 100 shares.
- deep in-the-money call
- A call with a strike far below the stock price, mostly intrinsic value, which moves almost like the shares.
- intrinsic value
- The part of an option's price you could collect right now by using it.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- delta
- How much an option's price moves for a $1 move in the stock, and a rough guide to the chance it finishes in the money.
Check yourself
Answer each question to see why the right answer is right.
1. XYZ is at $100. The $80 call with 90 days left costs $20.48 a share. How much of that is time value?
2. Why does a stock replacement use a deep call instead of the $100 strike?
3. XYZ climbs $5 to $105 today. Your 100 shares make $500. What does the $80 call make?
4. XYZ falls to $80 by the last day. How do the shares and the call compare?
5. You have $10,000 and buy four $80 calls instead of 100 shares. XYZ falls to $80. What happens?
Finished the video and the quiz? .