Never buy Stocks Again!!

     Most people understand the concept of buying stocks on margin, that is taking out a loan for half of the stock price.  This can nearly double your rate of return on the upside, but also double your loss rate on the downside.  What most people DON"T understand is how to invest even LESS money to get the same result.  Using option, you can create what is called a "synthetic long" position.  This enable you to get roughly 4x leverage and NOT have to pay interest. 

     It is done with stock options.  If for example the stock you have interest in is $100 in price.  You can simultaneously buy a call option and sell a put option to pay for it.  You will have to have roughly 25% of the stock price in cash (other ways, but keeping it simple), but the trade will perform nearly identically to owning the stock.  If the stock pays dividends, you will not get those, but that is usually a small price for the leverage and not having to pay interest on a margin loan.  Needless to say, you can reverse the process and create what is called a "synthetic short", effectively betting on a drop in stock price.  These positions effectively cancel out the time premium cost of just buying an option, so if you get the direction right you earn money immediately.

     Every stock investor should learn how to use options to enhance their activities.  This is a good place to start.  Ask your broker, or financial advisor for help to get started.  If you want a good book to read, I highly recommend McMillan, Options as a Strategic Investment.

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1 Response to Never buy Stocks Again!!

  1. I agree wholeheartedly – a synthetic long is far superior to buying a stock in ALMOST every situation (conversely, as stated, synthetic shorts are better than shorting a stock …) – my only caveat to add here would be to caution ANYONE from entering into a position that represents more shares than what they buy if they were buying stock. Yes, I’ve learned this the hard way – just because you’re only paying 25% of the value in cash doesn’t mean you should buy 4x as much!

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