Stock Exposure for Half the Cost
By:Kai Zeng
Trading stocks usually requires enough upfront capital to create barriers for many investors. Consider buying 100 shares of Amazon at $225 per share: It would require $11,250 in a regular margin account. For small-account traders seeking market exposure without such heavy capital requirements, synthetic options present a compelling alternative.
Synthetic positions use options combinations to create market exposure similar to direct stock ownership. Instead of buying shares outright, traders use options to create equivalent exposure.
Because options positions are much more flexible than simply long and short stock positions, traders can adjust the deltas on either or both put and call sides to meet their requirements. At minimum, the goal is to collect credit at order entry to avoid losing time value.
At-the-money synthetic positions closely mirror stock positions with a delta of nearly 100, providing almost identical directional sensitivity as owning 100 shares.
The probability of profit remains around 50%, similar to stock ownership, and the risk/reward profile maintains a linear relationship that matches stock performance. The key difference is capital efficiency, allowing traders to achieve equivalent exposure with much lower capital requirements. The reduced buying power requirement for Amazon synthetic options is $5,600, about 50% of a long 100 shares position.
Using out-of-the-money options instead can improve the position in several ways.
The trade-off is a different risk profile between the two strikes. It requires the stock to move above the long strike to be profitable at expiration.
Some important factors need attention when managing synthetic positions:
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.