Options Trading: Introducing the Synthetic Long

Posted On June 4, 2018 11:56 am
By: Steve Smith

Of the many options trading strategies that provide leverage, 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.

However, 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.

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Tagged with: options trading

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.