The great synthetic stock idea – Part 3

Thursday, April 27, 2023 – By:  Freewavemaker, LLC

On December 9, 2023 I wrote the first part of this story, The Great Synthetic Stock Idea – Part 1, which you can read by clicking on the link.  I followed this up with another article on February 13, 2023 titled, The Great Synthetic Stock Idea (MSFT) – Part 2.  If you are not familiar with these articles, I’d recommend you read them before reading this one to assure that this one makes sense to you.

What is a synthetic stock – A Review:

If you recall a synthetic stock is a way to get into a high dollar stock when you don’t have the full amount of cash needed to get into the stock itself – or – when you want to invest less to have the potential to make more.

To do this you would use stock options:  For example, you would BUY a Call Option with a strike price to expire at some point in the future.  To help finance this option you would SELL a put option with the exact same strike price and the same expiration date.

When you BUY a call option you are basically bullish on the stock and feel it will be at a higher price at some point in the future. When you BUY a put option you are bearish on the stock and believe it will be at a lower price in the future.  However, when you SELL the put option you are bullish on the stock and feel like it will be higher at some point in the future.  You are paid a premium to SELL this put option and the idea is that when the stock goes up you can BUY TO CLOSE that option at a lower price than what you were paid to SELL TO OPEN the position. 

  • FOR EXAMPLE:  You sell an option on XYZ and get paid $2,000 for selling the option.  Later the XYZ goes up in value and you can close out the position for $800.  So, you were paid $2,000 and you can close it out for a cost of $800 … you retain the $1,200 profit.  Now when this happens the broker will likely show a profit of 60% ($1200 ÷ $2,000).  However, the real gain would be more like 150% as follows:
  • $1200 received ÷ $800 actual out of pocket cost = 150%

What did I do?

If you read my second article you will find that I took some action on this on December 14, 2022 with the combination options on Microsoft Corporation (MSFT). Actually, this was done in my wife’s account.

On 12/14/2022 MSFT closed at $257.22 per share.  I could have purchased 300 shares of the stock for a total investment of $77,166.  However, what I chose to do instead, since I did not want to tie this much money into one stock – and since I really don’t care about voting rights (options do not allow you to vote at stockholder’s meetings like stock ownership does) – I opened the following options contracts:

LEG 1:  Bought 3 MSFT 01/19/2024 — $265 Call Options for a cost of $36.5766 per share (a total cash outlay of $10,972.99).

LEG 2:  Sold 3 MSFT 01/19/2024 — $265 Put Options for a total premium (income) of $28.9227 per share (a total income of $8,686.81).

TOTAL COST:  Paying $36.5766 per share and receiving $28.9277 per share (a net cost per share of $7.6489 per share) – or a total cash outlay from me in the amount of $2,296.18 with trading costs.

Think of that … holding the equivalent of 300 shares of MSFT for a net cost of $2,296.18 rather than spending $77,166 to actually buy 300 shares of the stock.  If the stock goes up, there is a chance to make a lot of money … but the most that can be lost if it goes down will be the net cost of $2,296.18.  Goodness … a $77,166 investment would only have to decline by about 2.978% to lose the same $2,296.18.  It’s pretty easy for MSFT to fall 3% in value in just one day.

From the date that I opened these options I had 411 calendar days ahead of me before expiration.  As of this writing there are 267 days left.  This means I’ve held this position for a total of 144 days now.  That’s about 4.8 months or 20.6 weeks.

How is the position doing?

Let’s take a look directly from my wife’s account (yes, this is actually her money).  Did you really think I’d take these kinds of risk with my money?  Just joking, the risk is a lot less than investing $77,166 into one company.  I mean it is really a whole lot easier to lose 100% of $2,296,18 than it is to lose let’s say 20% of $77,166 (a total of $15,433.20) – or worse yet 100% of $77,166 (which is probably not likely with MSFT … though I have seen the stock drop 20% in just a matter of weeks).


You will notice 3 lines in the above graphic ..

The first line is the totals so let’s start with line #2:  This is the Call Option she bought.  You can see that on this LEG 1 of the combination my wife paid $10,972.95 and that LEG is worth $17,400.00. So, she has a profit of $6,427.01 or a percentage gain of 58.57% in about 4.8 months.

Now for the line #3:  This is the option she sold.  You can see that she was paid $8,676.81 for these 3 options contracts.  If she wanted to close this position today, she would have to pay back $3,345.00 – but she would get to keep $5,331.81 of what she was paid.  This is a gain of $5,331.81 or a percentage return (as calculated by the broker) of 61.45%.

Now for the top line … Line #1:  This shows a total cost of $2,296.18 (that’s $10,972.99 minus $8,676.81).  The total position value is $14,055 (that’s $17,400 minus $3,345).  Therefore, her profit is $11,758.82 ($14,055 minus $2,296.18) or a percentage gain of 512.10% (which is $14,055 divided by $2,296.18).

So, what would the stock be worth?

Look at the 5th column from the left.  The stock as of this writing was valued at $304.35.  Therefore, if my wife would have purchased 300 shares of MSFT on 12/14/2022 at a cost of $77,166 ($257.22 per share) – it would be worth $91,305 today.  Yes, her gain would have been $14,139 or a percentage gain of 18.32%.

Now 18.32% gain on stock in 4.8 months is nothing to laugh at … but a gain of 512% in 4.8 months is certainly something to be very happy about. 

Now the only question is should my wife close out this option combination and do it again … or should she continue to let it ride?

To answer that question, let’s take a look at MSFT stock over the long term.  See the graphic below:

You can’t see the numbers so you will have to take my word for it (but you can always check on your on).  This is a five-year daily chart and it shows that MSFT closed at a high of $341.27 on 11/08/2021.  At a close yesterday at $304.83 it is getting pretty close (within $36) to the all time five-year high.  Could it go higher, yes it could … but I think we probably need to consider closing this out and doing it again in the not to distant future.

When I do convince my wife to close this one, we will likely do the same thing using one call and one put contract on three different stocks rather than putting it all in one stock.  I will update you on what we decide.

Until then remember:  You can’t row the boat without making waves and if you are not rowing the boat, you are probably just going where the currents take you. 

Thanks, and have a good time investing …

Jerry Nix | Freewavemaker, LLC

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