Synthetic Stock Variations

By Lawrence G. McMillan

In our last issue, the feature article discussed whether it might sometimes be preferable to trade the underlying stock as opposed to buying an at- or slightly in-the-money option.  This week’s article is a follow-up to that discussion: we are going to look at various option strategies that are, in effect, almost like owning the underlying stock.  The potential advantage of these option strategies is that they behave much like stock so time decay is not a major drag on the position.  Moreover, leverage is available through these strategies (not as much leverage as one would have in an option, but decent leverage nonetheless).  Leverage is neither good nor bad, but for those who want it, this is a way to achieve it without subjecting a position to onerous time decay.

In the study from the last issue, it was shown that owning the underlying stock instead of owning an at- or just slightly in-the-money call improved results in about half the cases.  We postulated that one would not necessarily have to own stock, but we didn’t get specific with what the alternatives might be.  Those are to be discussed in this article...

Read the entire Synthetic Stock Variations article (published 9/13/13) by subscribing to The Option Strategist Newsletter.