Apple recently closed back 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 constructed by selling an at-the-money put and buying an at-the-money call.
Let's look at Apple stock as an example.
Assuming investors wanted a bullish exposure via a synthetic long, they could sell a 150 put and buy a 150 call.
Currently, the September 2023-expiry 150 put is trading around $16.20, and the 150 call is trading around $18.50.
Cost Of Synthetic Long $230
Therefore, a September synthetic long stock trade would cost just $2.40 per contract, or $240.
As the name suggests, this is a synthetic long position, and the trader has a similar exposure to owning 100 shares of the underlying. That exposure would cost about $14,800 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 $240, the investor could still lose $15,000 if Apple stock went to $0.
This synthetic long trade produces an equivalent exposure to owning 100 shares for a lower cost.
For this synthetic long position, the margin requirement would be around $4,800. So the investor could use the leverage power of options to trade Apple stock for less.
Leverage May Also Magnify Losses
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.
According to the IBD Stock Checkup, AAPL stock is ranked number 2 in its group and has a Composite Rating of 80, an EPS Rating of 83 and a Relative Strength Rating of 47.
Meanwhile, the earnings iron condor on Salesforce discussed last month expired worthless on Friday for a full profit.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
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
