SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Synthetic Long Stock for Extreme Leverage


Among the many options strategies, one of the most interesting is synthetic long stock.  This combines a long call and a short put opened at the same strike and expiration. The name “synthetic” is derived from the fact that the two positions change in value dollar for dollar with changes in 100 shares of stock.

P/L chart of Synthetic Long Stock:
image.png


Position Construction:

  • Buy 1 ATM Call
  • Sell 1 ATM Put

The cost to open the position is close to zero and may even produce a small credit.


A couple of examples, both using closing values on May 31, 2018 and both citing options expiring on June 15, exactly two weeks away:

 

            Walmart (WMT) $82.54

            83 call, ask 1.08 = $113

            83 put, bid 1.36 = $131

                        Net credit = $18

 

            Macy’s (M) $34.91

            35 call, ask 0.89 = $94

            35 put, bid 1.17 = $112

                        Net credit = $18


In both examples, the closest to the money strikes were used. Both yielded $18 net credit to open the positions. The differences between strike price and dollar value is estimated as $5 for trading fees.


A period longer than two weeks could have been used as well. Because synthetic long stock involves buying a call and selling a put, longer-term positions do not present the time value problem usually faced by options traders. For example, with the net credit close to zero, the position combines to provide exceptional leverage, control over 100 shares not only for no cost, but for an $18 net credit.


The changes in value will mirror movement in the stock as it moves, point for point. The call’s intrinsic value above its strike is going to be one dollar higher for each point of movement in the stock. If the stock moves downward, the put gains one point for each point lost in the stock; and because the put was short, this represents a loss – in fact, identical to the loss of just owning the stock.


The options are likely to track closer to movement in the stock because time value is going to disappear fast, and extrinsic (volatility) value will be less of a factor in overall premium value as expiration approaches.


Some risk factors to remember:

  1. The market risk in synthetic long stock is the same as that of owning 100 shares of the stock. However, in this example, owning shares costs $8,200 for WMT, or $3,500 for M, either of which can be bought for 50% on margin;  and the short put is subject to margin requirements equal to 20% of the strike values. This means the short put margin cost is lower than the stock purchase cost.
  2. Losses in the short put are mitigated by closing the position, rolling it forward, or buying a later-expiring long put. Losses in long stock cannot be managed in the same way. Losses have to be taken or waited out.
  3. Holding the short put represents the primary risk in the position. However, this is the same downside risk as owning 100 shares of stock. The net cost to open the position is close to zero until the collateral requirements are considered. On a practical level, the most likely outcome would be to close the short put once it becomes possible to take profits, and leave the long call to appreciate. This is the best of both worlds: low-cost call with profit potential paid for by a short put position.

Image result for synthetic long stock


The market risk of an uncovered put is identical to the risk of a covered call. Combined with the limited risk of the long call, this makes synthetic long stock a very conservative trade.


Synthetic positions can also be opened on the short side, combining a long put and a short call. This may seem higher-risk than the synthetic long stock; but it can be made more conservative by covering the call. But as long as the call remains uncovered, synthetic short stock is higher-risk than synthetic long.


Synthetics are intriguing and interesting. They provide the possibility to profit from stock price changes, without needing to buy shares of stock. The offsetting cost/income also makes it practical to use long-term options without needing to worry about time decay. This affects both sides equally, meaning there is no net effect of decay during the period the position remains open.

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

What Is SteadyOptions?

12 Years CAGR of 127.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Harnessing Monte Carlo Simulations for Options Trading: A Strategic Approach

    In the world of options trading, one of the greatest challenges is determining future price ranges with enough accuracy to structure profitable trades. One method traders can leverage to enhance these predictions is Monte Carlo simulations, a powerful statistical tool that allows for the projection of a stock or ETF's future price distribution based on historical data.

    By Romuald,

    • 1 comment
    • 1,681 views
  • Is There Such A Thing As Risk-Management Within Crypto Trading?

    Any trader looking to build reliable long-term wealth is best off avoiding cryptocurrency. At least, this is a message that the experts have been touting since crypto entered the trading sphere and, in many ways, they aren’t wrong. The volatile nature of cryptocurrencies alone places them very much in the red danger zone of high-risk investments.

    By Kim,

    • 0 comments
    • 1,215 views
  • Is There A ‘Free Lunch’ In Options?

    In olden times, alchemists would search for the philosopher’s stone, the material that would turn other materials into gold. Option traders likewise sometimes overtly, sometimes secretly hope to find that most elusive of all option positions: the risk free trade with guaranteed positive outcome:

    By TrustyJules,

    • 1 comment
    • 17,178 views
  • What Are Covered Calls And How Do They Work?

    A covered call is an options trading strategy where an investor holds a long position in an asset (most usually an equity) and sells call options on that same asset. This strategy can generate additional income from the premium received for selling the call options.

    By Kim,

    • 0 comments
    • 2,664 views
  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 6,294 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 3,996 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 6,332 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 3,655 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 4,742 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 9,271 views

  Report Article

We want to hear from you!


Hi,

i read that:

 

Losses in the short put are mitigated by closing the position, rolling it forward, or buying a later-expiring long put. Losses in long stock cannot be managed in the same way. Losses have to be taken or waited out.

  1. How much ITM can the short put be before closing the synthetic long stock position?
  2. Rolling forward means future expirations?
  3. Buying a later-expiring long put without closing the position at the same strike?
  4. Assignment risk on the short put?
  5. For example is this strategy good now for Illumina stock? ILMN is not over sold but i am bullish.

Thanks

 

Share this comment


Link to comment
Share on other sites
  1. That's really up to you. If you allow the options to go too deep ITM, you risk assignment (which is not a bad thing by itself, unless you don't have enough funds).
  2. Yes.
  3. Not necessarily.
  4. Yes if it becomes too deep ITM.
  5. It can be used on any stock that you are bullish on. 

Share this comment


Link to comment
Share on other sites

This method works nicely on Snap. However.....

When I tried to use this method to buy a synthetic amzn at 2000, the system asked for 200K collaterals (see attachment). So it does not make a difference between the synthetic stock and buying 100 stocks. Is there a way to reduce the collateral? Thanks!

DE6D4AC8-0BC0-4FE8-9B38-FF107898F58D.jpeg

Edited by EmilyF2

Share this comment


Link to comment
Share on other sites
18 hours ago, Pirol said:

 

HI,

is there a way of synthetically be long say 30 shares of a stock?

Thanks

 

If I recall there are mini-options contracts available. Each contract covers 10 shares a piece 

Share this comment


Link to comment
Share on other sites

HI,

we can also be synthetically long a stock and hedge the position

  1. with a long put (married put)
  2. ATM, OTM or ITM put?
  3. 1 long put for 1 synthetic long  position?
  4. 1 long put gives me the right to sell 100 shares at the strike price, but 1 ATM put has a delta of 50, so is 1 put only for 50 shares?

Thanks

Share this comment


Link to comment
Share on other sites
On 8/30/2018 at 2:44 PM, Kim said:

Yes, but currently I see mini options only on SPX, DJX and NDX.

This is what i also see on CBOE under Products/Mini Options.

It seems that: (http://www.optionstrategist.com/blog/2013/03/mini-options-whats-point)

On March 18th, all of the major option exchanges began trading mini options on three stocks and two ETFs (AAPL, AMZN, GLD, GOOG, and SPY). A mini option is an option on 10 shares of the underlying instrument. 

They trade with a slightly different symbol. For the time being, the symbol for the mini-option is merely the regular underlying symbol with “7" at the end (AAPL7, AMZN7, etc.).

If we change the contract size in the options chain window to 10, then we should see the mini options but not all brockers allow this.

 

 

Share this comment


Link to comment
Share on other sites

HI,

the autor writes:

Losses in the short put are mitigated by closing the position, rolling it forward, or buying a later-expiring long put.

  1. closing the position: the entire synthetic or just the put leg?
  2. buying a later-expiring long put: why later-expiring?

Thanks

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs