Apple (AAPL) recently closed above the 21-day and 50-day moving averages and is showing strong accumulation.
Today, I want to look at using options to create a synthetic long stock trade.
A synthetic long stock trade is a way of taking an equivalent long exposure on a stock without having to put up any capital other than the margin requirement. (We’ll get to that shortly.)
The strategy is built by selling an at-the-money put option and buying an at-the-money call option.
Let’s look at Apple stock as an example.
Assuming investors wanted bullish exposure via a synthetic long position, they could sell a 150 put option and buy a 150 call option.
Currently, the 150 put due September 2023 is trading around $16.20, and the 150 call is trading around $18.50.
Synthetic length cost $230
Thus, a long synthetic stock trade in September would cost just $2.40 per contract, or $240.
As the name suggests, this is a synthetic long position and the trader has an exposure similar to owning 100 shares of the underlying. That exposure would cost about $14,800 if the investor bought 100 shares.
Therefore, this is effectively a leveraged position and may not be appropriate for all traders.
Even though options only cost $240 to trade, the investor could still lose $15,000 if Apple shares hit $0.
This synthetic long trade produces an exposure equivalent to owning 100 shares for less cost.
For this synthetic long position, the margin requirement would be around $4,800. The investor could then use the leverage power of options to trade Apple shares for less.
Leverage can also increase losses
Of course, leverage is a double-edged sword, and falling stock prices will add to losses.
Remember that options are risky and investors can lose 100% of their investment.
According to the IBD Stock CheckAAPL’s stock is ranked number 2 in its group and has a composite rating of 80, a BPA Classification 83 and a Relative Strength Ranking of 47
In the meantime, the iron condor of profits in Sales force (CRM) discussed last month expired worthless on Friday for full benefit.
This article is for educational purposes only and is not a commercial recommendation. Always remember to do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Master’s in Finance and Applied Investing. He specializes in income trading using options, he is very conservative in his style and believes that patience to wait for the best setups is the key to successful trading. Follow him on Twitter at @optiontradinIQ
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