Builders FirstSource was added to the SwingTrader portfolio on Aug. 11 with a buy point of 71.78. So, let's look at using options to create a synthetic long stock trade in BLDR stock.
BLDR Stock: Why Consider This Option 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. Construct this strategy selling an at-the-money put and buying an at-the-money call.
Assuming an investor wanted a bullish exposure in BLDR stock via a synthetic long, she or he could sell a 70 put and buy a 70 call.
Recently, the January 2023-expiration monthly put with a 70 strike price traded around $7.65 per contract. The 70 call traded around $9.35.
Therefore, a January synthetic long stock trade would cost just $1.70 per contract, or $170.
Leverage And Related Risk
As the name suggests, this is a synthetic long position. The goal? Now the trader carries similar exposure to owning 100 shares of the underlying stock. That exposure would cost about $7,075 if the investor bought 100 shares.
So, this is effectively a leveraged position and may not be appropriate for every trader.
Even though the option trade only costs $170, the investor could still lose $7,170 if BLDR went to $0.
This synthetic long trade gains an equivalent exposure to owning 100 shares for a lower cost. For this synthetic long position, the margin requirement would be around $2,300, so the investor could use the leverage power of options to trade BLDR stock for less.
Of course, leverage is a double-edged sword, and a falling stock price will magnify losses.
Please remember that options are risky, and investors can lose 100% of their investment.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
