UK Accounting Glossary
A stock replacement strategy is an approach to investing that employs a combination of futures and options to replicate the returns achieved by stocks or other assets. Investors might choose to use a stock replacement strategy because they can potentially realize a gain from the leverage provided by derivatives, but at a lower cost than that incurred from buying actual assets. The ultimate aim of a stock replacement strategy is to maintain profits while minimizing losses. In a simple version of a stock replacement strategy, an investor purchases deep-in-the-money options that rise and fall by an amount nearly equal to that of the underlying asset. More complex implementations of a stock replacement strategy require a high level of technical analysis to identify trading ranges and levels of resistance. For instance, investors might supplement their stock replacement strategy by purchasing covered calls, which protect against sideways moving or slightly down-trending stocks.
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This glossary post was last updated: 5th February 2020.