The past few years have been very instructive even for veteran investors.

Even during the long bear market sharp, sudden rallies came from virtually out of nowhere. And the new bull market began without almost any advance notice.

The lesson is clear — it pays to have exposure to the market at all times.

One way to do this is to use stock options.

Options are excellent speculative vehicles. Cheap options can give you outstanding bang for your buck, or good downside insurance when you buy puts.

You can also use options as a replacement for purchasing stocks, and get far more leverage and far less risk as you participate in the stock market.

This strategy not only gives you upside participation but also protects you from the risk of a market crash as long as you don’t go overboard.

To use options as surrogates for stocks you must usually purchase in-the-money calls (the stock price is above the strike price) that have minimal time value. In-the-money options are expensive.

When dealing with more expensive stocks you will have to pay from 5 points to 10 points ($500 to $1,000) for in-the-money options. The drawback to this is that if the stock has a sharp correction much of your premium will collapse.

To protect yourself somewhat from this you can buy a out-of-the-money LEAP, which is a long-term option that can last for up to two and a half years. This large amount of time helps the option premium hold up better during a stock decline.

But a LEAP is more expensive than a shorter-term option. So when you buy a LEAP it is very important to set a mental stop loss on the underlying stock.

If the stock closes below this stop loss, sell the LEAP. This will usually protect you from losing much or all of your option premium if the stock declines. Letting time and money slip away is a major sin of option buyers.

This stop loss should be a trailing stop. As the option increases in price due to a rise in the stock you keep moving the stop loss up so that it is never more than 10% below the stock price.

But if the stock price declines, you do not adjust the trailing stop. This way, if the stock declines 10% from its high you will be able to sell the LEAP in plenty of time to preserve most of its profit.

Also, LEAPs tend to lose their value quickly in the last six months before expiration. So if you own a LEAP that is out of the money when it moves into its final six months of life, you should strongly consider closing your position.

Another key to buying LEAPs and in-the-money options is to make sure that you are paying a fair price. These options cost more than short-term, out-of-the-money options, so your risk in the event of a price collapse is greater.

The less money you have on the table, the less your risk will be.

The best way to determine the fair value of any option is with a pricing program such as Option Master.

One of the beauty of buying LEAPs is that many become undervalued because option traders tend to focus on short-term options and simply extrapolate short-term trends out into the future to find a price for a LEAP. Option Master, which is available from our online store, will help you find these undervalued gems.

To sum up, options can be excellent surrogates for stocks. But be sure to pay a fair price for these more expensive options and use a stop loss to protect your premium in case the stock declines.

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For additional information about LEAPs look at our seminar video course which gives you trading tactics for a dozens of different options strategies click here.