Buying Stock at 1/4th The Price? Our Synthetic Long Stock Strategy
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Buying Stock at 1/4th The Price? Our Synthetic Long Stock Strategy


Hey everyone. This is Kirk, here again at optionalpha.com
where we show you how to make smarter trades. Today, we’ve got a really cool video for you
that I think you’re really going to love because it shows you how to buy stock at basically
1/4 of the price and capital requirement that it would cost to traditionally just go long
stock and that’s using synthetic long stock with options. Do you guys even know that you can still have
the same risk reward features of owning the stock without actually owning the underlying
stock? Since we know that owning and holding long
stock is so capital intensive, today we’ll show you how you can use options as a way
to synthetically go long with 1/4 the capital requirement. This is how we’re going to setup this strategy
with options. First, we’re going to buy an at the money
call option because we’re going to go long the stock and then at the same time, we’re
going to go across the option chain and sell one at the money put option at the exact same
strike price, so buying a call at the same strike as we sell a put option all in the
same strike price. What’s the risk in this position? Just as with a traditional long stock position,
you do have unlimited risk should the stock continue to fall into expiration. We’re trying to replicate a stock position,
so in that case, we do have unlimited risk that the stock does continue to fall. As far as profit potential, because you are
emulating a long stock position, you have unlimited profit potential up until the expiration
of the options you traded. This is the only caveat to the strategy, is
that we can replicate almost everything with a stock position except for the fact that
stock, you can hold much longer and with options, you do have a defined expiration date. But this is also great strategy if you want
to pinpoint or target some long stock positions or short stock positions into different times
of the year. How do you calculate the breakeven points? In these, it’s very simple. It’s your long strike price plus or minus
any debit or credit that you receive on the trade. Usually, you’ll pay a net debit to enter the
trade, but in some cases, if the options are trading just a little bit higher than where
your strikes are, you might end up with a credit, in which case, you would take that
long strike and subtract out the credit that you paid. Let’s go to our broker platform here on Thinkorswim
and we’ll take a look at an example. GE is a very popular stock for people to own. I know a lot of people own in their portfolio
and just judging by today’s volume, almost 37 million contracts that were traded, I’d
say it’s probably still a very popular stock to trade. It closed the day just above 204, so if we
wanted to go long this stock and go long it with 100 shares, we could go ahead and buy
100 shares of GE at $2,404. If we did that, our capital requirement on
this trade to go long of 100 shares would be about $2,409. You can see that’s the cost to get into this
trade, $2,409 to get into this trade. That’s a lot of money to throw into just
one stock in one trade. What we can do with options is we can replicate
that position by using an at the money call strike and selling an at the money put strike. In this case, we will use the 24 strikes which
are right here, those are the closest strikes to where the stock is currently trading at
$2,404, we’re going to buy the call option and then we’re going to go ahead and sell
the corresponding put option at the exact same strike price. You see in this case because our strike price
is just a little bit lower than where the stock is trading, we do receive a small credit
of $.10 or $10, but the key here is that we’re trading the exact same strike prices on both
sides going long the call option and short the put option. This gives us the exact same profit loss diagram
as we would have if we just have the long stock. You can see that’s exactly the same, just
one upward trending line. The key here is that when we go ahead and
try to confirm this order, you can see that the cost to get into this trade is just about
$7 because we receive a credit, but what our broker really covers in margin is about $544. Even though we do receive a credit to get
into this trade, I don’t consider that to be the investment. I consider our investment to be what the broker
is holding in margin which is $544. When we compare this to the $2,400 that it
cost to actually own the stock below, you can see why it costs almost 1/4 to go synthetically
long GE as it does to just buy the stock outright. Using options, we’re able to get into and
mimic the same risk reward features of a stock position, but with 1/4 of the capital required
to make the trade. Some of the key takeaways from going synthetic
long a stock: These are great alternatives to buying the stock outright like we said
because they require such a low capital investment. But again, don’t let these smaller initial
investments blind you to the massive risk that you’re taking with this strategy. By no means does the fact that you’re investing
upfront a smaller amount of capital mean that you have smaller overall risk. You still are mimicking a stock position. If tomorrow, the company goes bankrupt and
goes all the way to zero, you do carry that risk through the trade and I think that that’s
an important point to close out this video with. As always, if you guys have any comments or
questions, please ask them right below in the comment section on the lesson page. Until next time, happy trading!

About Ralph Robinson

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