SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

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?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Equivalence

    Some option positions are equivalent – that means identical profit/loss profiles – to others. Others are not. A few days ago I had an inquiry from a person trading options in a restricted account (e.g. an IRA that did not allow marginable trades or short options positions):

    By cwelsh,

    • 0 comments
    • 97 views
  • Investment Ideas for Conservative Investors

    Investors with low willingness or need to take risks often look to bank and/or life insurance company fixed-rate products to increase potential returns instead of leaving their money in conventional checking or savings accounts. Some of these product types are CD’s, structured notes, fixed annuities and fixed indexed annuities.

    By Jesse,

    • 0 comments
    • 165 views
  • iVolatility Tools: Advanced Ranker

    Here is one of the analytical tools that allows us to claim "In options we are Big Data!" For those who want to find the movers and shakers, Advanced Ranker does the job. The Advanced Ranker combines an easy to use interface with a powerful sorting logic built on IVR and IVP.

    By Levi Ioffe,

    • 0 comments
    • 144 views
  • Two Pre-earnings Momentum Trades With a Technical Trigger in Alphabet

    Both option trading backtest approaches rely on the fact that there has been a bullish momentum pattern in Alphabet stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. 

    By Ophir Gottlieb,

    • 0 comments
    • 322 views
  • Flaws in Implied Volatility

    A technical study of chart patterns, focusing on historical volatility of the underlying, reveals that depending on implied volatility is a flawed idea. Traders should remember that options are derivatives, meaning their premium value is derived from historical volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 396 views
  • 7 Trading Cliches For Novice Traders

    Trading is a tough business. There is no easy money in the stock market, but there are a lot of folks who will easily take your money. What is important to know that no matter how experienced you are, mistakes will be part of the trading process. This article should help you to avoid some of those mistakes.

    By Kim,

    • 0 comments
    • 365 views
  • Iron Condor vs. Iron Butterfly

    Iron Condor and Iron Butterfly are both very popular strategies. Both of them are usually used as non-directional strategies (although butterflied can be used as a directional trade as well). Both trades are vega negative and gamma negative, but there are also few important differences between those two strategies.

    By Kim,

    • 0 comments
    • 368 views
  • Leveraged Anchor: A Three Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for three months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 10 comments
    • 1,076 views
  • How a Fund is Developed

    Many individuals are curious as to the testing process for a new fund.  With the plethora of funds continually being developed, having some insight into this process can be helpful for investors.  At the very least, it can provide a series of questions which should be asked in conducting due diligence on fund managers.

    By cwelsh,

    • 0 comments
    • 295 views
  • Why Dow Points Are Meaningless

    A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.” These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear.

    By Kim,

    • 0 comments
    • 333 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