Selling shares and buying deep in-the-money long-dated calls in their place, keeping most of the upside while freeing capital and capping downside.
A call with a delta near 0.90 moves almost like stock but costs a fraction as much. Replacing shares with such a call releases capital and converts an open-ended downside into a known maximum loss, which is why traders use it after a large run-up.
The bill comes in three parts: the call's extrinsic-value decays, you forgo dividends, and the position must be rolled before expiry. Deep in-the-money leaps minimise the first problem, and the calculation is simply whether the extrinsic paid is less than the capital freed is worth to you.
Example: you hold 500 XYZ at $50, worth $25,000. Sell the shares and buy five one-year $35 calls at $16.20, spending $8,100. You retain roughly 85% of the directional exposure, free $16,900 of capital and cannot lose more than $8,100.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.
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