Options are generally thought of in one of two ways: Covered Calls to generate extra income on positions and protection against your position moving against you in the short run. But they can be used for many other uses as well. One of those is stock replacement.
In a stock-replacement strategy, the trader or investor invests in a stock using only options instead of buying the stock. For a trade to the upside they buy Calls. This can drastically reduce the capital at risk and limits the downside.
Look at Red Hat Inc. (NYSE:RHT) as an example that looks like a possibility today.
Red Hat established a cup-and-handle pattern (orange), triggered on July 22. If you bought the stock then at 55 you have a $3 gain today with a target on that pattern to 64 higher still. What makes it even better is that there is now a bigger cup and handle (green) that targets 70, should it trigger by moving higher out of the bull flag that makes up the handle. But that handle can continue lower for a while without negating the pattern. That means there would be no technical reason to sell the stock until the pattern failed at 53.50. But at that point you would be down on the initial trade.
What To Do?
You can continue to participate in the upside and take some gains on your trade by replacing the stock with a call option. Selling the stock at around 58.25 and buying the September 57.5 call for $2.50 is one way to do it. That would put 75 cents in your pocket and allow you to continue to participate in the upside. But the difference in your participation is that now your downside would be limited to the cost of that call at $2.50. This means you are guaranteed at least a 75-cent profit no matter what. That's because even if the stock goes to zero tomorrow, the calls have no risk outside of the initial price paid, or premium. If you keep the stock with a stop loss at 55.75 to try for that same 75 cent minimum profit, you still have risk that the stock gaps down on you overnight and you can take a loss.
Take the trade one step further and even if you have no position now, you can start to participate in the upside at a cost of no more that $2.50 by buying that September 57.5 Call.