Low Exercise Price Option (LEPO) can be used by investors to replicate the payoffs of a futures contract by taking advantage of the arbitrage opportunities that exist between the two. This is done by selling short-dated at-the-money call options and buying deep in-the-money puts, both with an exercise price of one cent. Since stock options are less costly than their futures counterparts, this helps ensure that the investor will not lose much money on his initial investment.LEPOs are trading instruments that allow people to create a synthetic stock position by paying only one dollar for a call option. They help investors profit from the rise of stocks without actually buying the stocks themselves. Because they trade like futures, an investor can hedge their positions by buying or selling them on an exchange.A LEPO is an option on a stock that has a strike price of $0.01 and expires at the same time as the underlying stock. It differs from traditional options in that it doesn't possess any intrinsic value or extrinsic value (time value). In fact, these options are so cheap as to make no sense for an investor to purchase them in the first place. The primary benefit of a LEPO is that it allows investors to trade options without having to pay transaction fees.LEPOs are deep-in-the-money options with an exercise price of one cent that mimic a futures contract. They function as call options: the buyer has the right, but not the obligation, to buy shares at any time during the life of the option for a fixed strike price.
