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Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term by Wayne Ferbert, Jay Pestrichelli

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22. Stock Replacement Tactic That’s Easy on Your Cash

“My philosophy: a hundred-dollar shine on a three-dollar pair of shoes.”

—John Winger (played by Bill Murray) in Stripes (1981)

Bill Murray’s character in Stripes just may have had the right idea. If your shoes look like they cost you $100, do they serve the same function as if they actually cost a $100? Maybe, but the point is do you need to buy outright stock if long calls will give you virtually the same exposure?

One of the most popular uses of Options is buying calls. Calls, as you are now well aware, give the long holder the right to buy shares of an underlying at a given price by a certain time. The owner puts up a premium that affords him this right. This is probably one of the most ...

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