Synthetic Stock Idea – Part 4
By: Jerry Nix | Freewavemaker, LLC Date Published: January 9, 2024
Note from Author: I first wrote about this idea in 2022 and followed that up with other parts to the story. This is part four. If you’d like to read the first three parts, and I recommend that you do if you’re a beginner at investing in options, then you can click on the links below:
- The Great Synthetic Stock Idea – 12/09/2022
- The Great Synthetic Stock Idea (MSFT) – Part 2 – 02/13/2023
- The Great Synthetic Stock Idea – Part 3 – 04/28/2023
Dear Reader:
If you have read any of the stories on my blog you know that I love to write and will write about almost anything and everything. But one of the things I like to write about most is investments that have made me money and that can make you money, maybe.
I say maybe because you need more than what you may read about in any of my investment posts. Because this is a “free site” and because I do no personal or group coaching, nor do I offer investment advice; I strongly recommend that you do a little self-study and potentially try some of my ideas in a fake or paper trading account before actually putting money on the table.
Actually, the way I learn best is by putting money on the table. Then, if I make a mistake, it hurts and I am likely not to make that mistake again. If I don’t make a mistake, I make money … and that can be a very rewarding experience that lasts longer than what I would get from a paper trading account.
You, Dear Reader, must do what is right for you. The one thing I can assure you is right for all, though, is to gain some knowledge – and this is the start of your gaining at least some knowledge.
What is a synthetic stock?
If you’ve read my previous articles, you know that it is nothing more than an option spread where an investor (if he/she feels the stock is going up) will BUY a call option, at the money, and SELL a put option, at the money, with both options having the same expiration date and the same strike price (the at the money price). If the investor feels the stock will go down, they will reverse this strategy and BUY a put option and SELL a call option – again with the same strike price and expiration date.
In a bull (rising) market either buying a Call or selling a Put option is a bullish move. In a bearish (declining) market either buying a Put or selling a Call option is a bearish move. You always want to be on the right side of the market … rising or declining.
Personally, I am always more bullish than bearish because after having worked in the field of investments for 42 years of my life, I know – and am comfortable with – the fact that the markets, in general, are rising 65% to 70% of the time year after year. You can check this out going all the way back to the beginning of the U. S. Stock Exchanges. However, just check out the graphic below:
S&P 500 Quarter by Quarter for 43 years
If you can count the red bars, you will find there are 55 of them. That means that over the past 172 quarters the market (as measured by the S&P 500) has been down for 55 of them. That means that the green bars (up markets) represent a total of 117 quarters of rising markets over the past 43 years. So, the market has been down 31.98% of the time and up 68.02% of the time over the past 43 years (on a quarter-by-quarter basis). It’s safe to say that if we had a daily, weekly or monthly chart showing it would be close to the same proportions.
If you don’t believe that, you could wait about 43 years and see for yourself … but of course you won’t make any money by waiting.
History of one of my Synthetic Stocks – MSFT:
My second and third article above mentioned the Microsoft (MSFT) Synthetic Stock I did … though I never completed the history of that one. I did eventually sell it about 6 months after I began it. The table that follows tells the story:
My Track Record on MSFT Options 1
Explanation:
On December 14, 2022 I bought 3 Call Options on MSFT with a strike price of $265 and an expiration date of January 19, 2024. It COST me $10,972.99 to purchase these three contracts. To help finance this purchase on the same day I sold 3 Put Options on MSFT with a strike price of $265 and an expiration date of January 19, 2024. I was PAID $8,676.81 to sell these 3 Put Option Contracts.
My net cost to enter this trade was $2,296.18 out-of-pocket.
The stock, as expected, trended up – as did the options. I noticed on 06/15/2023 (about 6 months and a day later) I could BUY BACK the put options for a COST to me of $1,267.98; which means I would keep $7,408.83 of the original amount paid to me of $8,676.81. On this transaction, alone, I netted a gain of $7,408.83 or 584.30% return. Not bad for 6 months. The reason the gain was so nice on the Put Option is because as the stock trended up the value of the Put Option became less valuable … meaning I could close it out for less than I was paid to sell it.
As for the Call Option … since the stock trended up the premium on that trended up and the option became more valuable. I found I could close that out by selling it back into the market for $26,544.80 netting a nice profit over and above the cost for that option of $15,571.81 or 179.46%. Again, not a shabby return for a holding period of 6 months.
Now, when you look at the total “synthetic stock strategy” you will find the following:
Net Amount Invested = $2,296.18 (cost of Call option less premium for Put option)
Net Amount Received = $25,276.82 (cost to buy put plus proceeds to sell call)
Net Profit = $22,980.74 or 1,000.82% ($22,980.74 ÷ $2,296.18)
Now that was a nice 6 month profit
So, what was next?
I’m not one to set idly by and let the market pass me up. I had some cash in the account and knew that as cash it would do very little for me so I decided on two new Synthetic stock ideas.
My New Synthetic Stocks
On 06/15/2023 I bought (1) of the 06/21/2024 Calls on NVDA (Nvidia) with a strike price of $425 for a total investment out-of-pocket of $9,375.66 and turned around and sold (1) of the 06/21/2024 Puts on NVDA with a strike price of $425 and received $7,429.28 income into my account. The net cost of these two transactions was $2,326.38. As of this writing the Put option is up 80.07%; meaning it would cost me $1,405 to close it out and I would keep the difference between the $7,429.28 received and the $1,405 it would cost to close it out ($5,644.28). The Call option has grown from its original cost of $9,366.76 to a value of $14,125 if I closed it out today … netting me a return of $4,749.34 or 50.66%. However, when you look at the total transaction, I have a cost of $2,326.38 against a value on the two options of $12,720 – for a gain of $10,393.62 or 446.77% overall. Since this option does not expire till June 21st this year, I will likely hold onto it until the end of April or early May.
On 06/16/2023 I bought (2) of the 03/15/2024 Calls on META (Facebook) with a strike price of $280 for a total investment out-of-pocket of $9,014.32 and turned around and sold (2) of the 03/15/2024 Puts on META with a strike price of $280 and received $6,197.64 in-pocket into my account. The net cost of these two transactions was $2,816.88. As of this writing the Put option is up 94.09%; meaning it would cost me $336 to close it out and I would keep the difference between the $6,197.64 received and the $336 it would cost to close it out ($5,831.64). The Call option has grown from its original cost of $9,014.32 to a value of $16,600 if I closed it out today … netting me a return of $7,585.68 or 84.15%. However, when you look at the total transaction, I have a cost of $2,816.68 against a value on the two options of $16,234 – for a gain of $13,417.32 or 476.35% overall. Since this option does expire March 15th this year, I will likely close it out later this month or in the first week of February.
It will be in the latter part of this month or first part of next month that I will look for a new play to invest the money made in the META option. The stocks on my radar as of now is …
- Another META option, Facebook
- NVDA option, Nvidia Corporation
- MSFT option, Microsoft,
- AAPL option, Apple Computer or even
- AMD option, Advanced Micro Devices, or
- ARM option, Arm Holdings, PLC as potential Synthetic Stock Plays.
Of course, depending on how things go it may be something that is not even mentioned above. I will make that decision when the time comes.
In Closing:
As of the morning after I wrote the above article this is how the options looked on the two, I wrote about:
Value of Options on 01/10/2024
As you can clearly see, the value of the META options has gone from 476.35% overnight to 534.57% while the NVDA options have gone from 446.77% to 423.35% over the same period. Trying to watch investments like this multiple times per day, or even daily, can drive you crazy. I recommend looking at them only once per week since you are likely setting these up for expiration 6 months to a year out anyhow.
Whether or not you make investments like this is entirely up to you. I am not recommending any investments to you. I am simply showing, for educational purposes, some of the things I am doing in my own accounts. You have to ultimately decide what is best for you.
However, this is a way to invest in hopes of gaining the rising price of stocks with less cash outlay on your part. On the day I bought these options the closing price of META was $281 per share and the closing price for NVDA was $426.53. Therefore, to purchase $200 shares of META would have cost $56,200 and the cost to buy 100 shares of NVDA would be $42,653 for a total investment amount of $98,853. I was able to do the same thing (since 1 option contract = 100 shares of stock) for a total cash outlay of $5,143.06. If these two companies went broke (highly unlikely) you could lose $98,853 owning the stock whereas if the options ended up worthless, you’d only lose $5,143.06. If the two companies’ stock was to decline by just 10% you would lose $9,885.30 owning the shares and the most you would lose with the options (at a 100% loss) would be $5,143.06.
Incidentally, NVDA stock is up about 28% since 06/15/2023 and META stock is up about 30% over the same period as compared to gains of 423.35% and 534.51% using this “synthetic stock” strategy. The leverage you gain using this idea can be astounding when it comes to total return.
WARNING: You can lose more than you invest in the options if you don’t take them off the table in time. To learn more, I would encourage you to go to YOUTUBE.COM and type Synthetic Stock in the search bar to review videos of exactly how these can work for you. Here are two that you could start with that are only 6 to 7 minutes long.
With that I will bring this series of articles to a close with this simple reminder:
You can’t row the boat without “making waves” and if you are not rowing the boat, you are likely only drifting where the currents take you ~ Jerry Nix | Freewavemaker, LLC