Some insiders say that technical manipulations such as short-covering and institutional buying, not fundamental value, have been responsible for most of the run ups. But whatever the cause, the lesson is clear -- it pays to have exposure to the market at all times.

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 protects you from the risk of a crash in the market, 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.

To protect yourself somewhat from this you can buy an 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 5 or 10 percent below the stock price. But if the stock price declines, you do not adjust the trailing stop. This way, if the stock declines from its high you will be able to sell the LEAP in plenty of time to preserve most of your 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 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 beauties 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.