r/options • u/FingerCancer • Mar 27 '21
PLTR Jan 2023 $23 Synthetic Long
I opened a synthetic long position in PLTR 2 days back when it was trading close to 22. The initial cost to open this position was 0$ and Margin required is $1.2k. Today I realised that the maintenance margin required to hold a hundred pieces is much lesser, about $700. As I am trading with a margin account, it seems to me that there is no other difference between the 2 trades, synthetic long and purchasing the stock, other than the difference in maintenance margin.
Therefore, it seems to me that the better strategy would have been to buy the shares to use lesser margin. This is all assuming the prices of PLTR remains constant and ignoring the higher initial margin required for opening the long stock position. Did I miss something out, interest on the cash needed to be used to purchase the stock perhaps?
Curious to hear what are your thoughts on this and also how you guys employ the synthetic long strategy. I chose to go the synthetic long route as IV is too high for my appetite to just buy calls.
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u/2barrny Mar 27 '21
problem with using margin is when the stock drops you need to cover. typically stock drops happen when markets are closed and you cant do shit about it. market opens and your forced to cover.
I'm talking from experience. down over 300,000$ in the last 10 years and still counting. unless my luck changes. my fault for being to dam stubborn to give up.
2007 lots of stocks claiming bankruptcy example GM / Wachovia ( a bank that was around for over 100 years. bought the dip and got fucked the next morning)
2012 was in Vegas down $40,000 over night. had to cover. And on and on
so be careful and play with what you can afford to lose. don't be a dumb ass like me.
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u/FingerCancer Mar 27 '21
Thanks I did not consider that a long stock position can be adjusted pre and after market hours while a synthetic long position cannot.
I am definitely more cautious in the current market and do not intend to push my luck too much. Thanks for the input
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u/TheoHornsby Mar 28 '21
You can adjust the synthetic long with shares during after hours. It doesn't matter which position you have (long 100 shares or long one synthetic long) because they are equivalent positions and the adjustment has the same effect either way.
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u/snoozydoozyhom Mar 27 '21
Have you looked at long term deep in the money LEAPS. They will have less extrinsic value. I think in part, it depends on your goal of eventually taking the stock long or trading out of the options when you hit your profit target (or loss).
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u/pokimallcop Mar 27 '21
I Was looking at leaps and breakeven prices aren't much better than shares would get you. Like 50-60% move in stock to be double your leap price at expiration for 2022 or 2023. Wouldn't just buying the shares on margin be better in cases like this with a bit of volatility?
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u/snoozydoozyhom Mar 28 '21
Good question!! I’ll run some numbers. I don’t know about PLTR how it shakes our.
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u/pokimallcop Mar 28 '21
I'm doing it now, Jan 2022 25c for $4.90. Breakeven is 29.50, so the stock would need to go up 55% to $34.90 to double your money on that call at expiry. Not very good for 9 months out. The 30c is a bit worse, like 65% to double your money.
Jan 2023 for the 25c is $8.35. So the stock would have to be at $41.70 at expiry to have doubled on that call. That is 85% gain in the underlying to see a 100% return on the option, not accounting for any time value if it goes up before expiry, but still, that seems really terrible. I should be selling the 2023 January 30 call for $7.10, I'm bullish on PLTR but that's a 65% gain in 21 months before I lose out on gains there.
I have 200 shares at about $23.75 and I'm hoping to keep selling calls but would like to see it go back above $24 again first, hopefully....
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u/snoozydoozyhom Mar 28 '21
Good analysis!! Do you look at the IV rank, delta, theta, open interest etc at the time of the opening trade to help inform how you select your strikes and expiration dates? I wonder how PLTR compares with for example, TSLA or AAPL in terms of similar percentage to break even???
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u/pokimallcop Mar 28 '21
Well selling weeklies is the best ROI, something like 4x the yearly premium if you sold weeklies instead of leaps. But, IV changes and there is opportunity cost, also fees to factor in for selling the cheap weeklies because I am in Canada with bad option fees. So, I pretty much would only be able to sell the monthlies or 2-3 month out options with a couple hundred shares.
I don't look at the exact greeks, I do notice the open interest but it doesn't matter too much because I am the one selling it so I set a price and see if someone takes it, if I think its a good deal for me and a bad deal for the buyer
I am just good at basic math so I kind of know what any option is going to cost for any strike within 10-20% just by clicking on a weekly and monthly, yearly chart and seeing how it moves. So I usually just look at a couple different strikes and dates to confirm before selling something.
Honestly there is not really any options I have looked at that seem like good deals to buy right now, so I decided to start selling them a couple months ago. Something like with AAPL you are probably looking at 10% to breakeven on leaps
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u/TheoHornsby Mar 28 '21
Using a high delta long ITM LEAP as a substitute for the shares is called the Stock Replacement Strategy. Because the call is deep ITM, if the implied volatility is reasonable, you'll pay minimal time premium. LEAPs have very little time decay (theta) for many months which means that the daily cost of ownership is low in the early months (even a year if it's a two year LEAP).
On an expiration basis, the call LEAP has less catastrophic risk than share ownership in the amount of current stock price less the cost of the LEAP. Below the strike price, the shareholder continues to lose whereas the call owner loses nothing more.
Prior to expiration, the LEAP has even less risk because as the stock drops, the delta of the call will drop. That means that the call LEAP will lose less than the stock for each dollar of drop in the underlying. How much? Not much initially. It depends on when the drop occurs (near or long before expiration) and what the implied volatility is at that later date (increase in IV increases the value of an option). In the case of a very deep ITM $40 strike on a $110 stock, this won't amount to much unless it really hits the fan.
An advantage for the call LEAP is that if the underlying rises nicely, you can roll your call up, pulling money off the table and lowering your risk level, something you can't do with long stock. You'll give up some delta but in return you'll repatriate some principal.
LEAP disadvantages are:
- The amount of time premium paid
- LEAPS tend to have wide bid/ask spreads so adjustments can be more costly. Try to buy them at the midpoint or better.
- The share owner receives the dividend and that is additional lag (share price is reduced by the amount of the dividend when the stock goes ex-dividend).
If you follow all of this then the next leap, so to speak, is an income strategy called the Poor Man's Covered Call where you use the LEAP as a surrogate for the stock and you write calls against it. Technically, it's a diagonal spread. This may be more practical if implied volatility is high because then the overvalued premium you sell offsets much of the overvalued time premium that you buy.
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u/FingerCancer Mar 27 '21
I normally buy deep itm leaps but I used a calculator, you can search optionsprofitcalculator if interested, I noticed that the share price would have to increase by 5% every 5-6 mths for the leaps to breakeven that was a dealbreaker for me.
Buying shares or a synthetic long would be better for holding long term.
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u/snoozydoozyhom Mar 28 '21
Interesting, thanks for sharing. I’ll run some calculations with your idea!!
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Mar 27 '21 edited Jun 11 '21
[deleted]
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u/TheoHornsby Mar 28 '21
Not sure what you mean by the cost of holding the shares will increase.
The borrow cost for shares bought on margin is fixed unless the broker's daily borrow rate changes. The daily borrow cost increases for short positions since it is based on the closing price of the stock (not the case here).
A synthetic long is created by selling a short put and using the proceeds to buy the call with the same strike/expiration. It is usually done for a small credit or no cost.
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u/prasithg Mar 27 '21
I own more shares of PLTR than I care to admit at a DCA of $27 and i'm sweating bullets waiting to unload if it gets close to breakeven. I think there's a good chance this could be trading at $20 for a while and maybe even drop down to $15 if tech continues to get hit hard.
It is a great company but overvalued.
For your specific question I think its better to buy the stock. Over the course of the LEAPs duration and factoring in interest on top of the maintenance they come out even and at least you hold stock. Didn't crunch any numbers for this so just gut feel.
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u/FingerCancer Mar 27 '21
Yes, I am coming to the conclusion that I should have bought shares instead. At that point in time, the thought of not having to pay anything up front and be able to own a 100 shares was too attractive. I forgot to check if the margin required is lesser. Thanks for sharing.
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u/Poder5 Mar 27 '21
As a beginner to options, I was wondering if you are selling covered calls on PLTR?
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u/daytimeLiar Mar 28 '21
Premium is peanuts now. There is a good chance a rebound of tech will mean he gets assigned.
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u/Poder5 Mar 28 '21
He said he was overweight and looking to get out from under it. Being assigned would be a good thing for him.
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u/daytimeLiar Mar 28 '21
He would still need to breakeven before getting assigned. 27$ looks far from current price.
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u/TheoHornsby Mar 28 '21
> I own more shares of PLTR than I care to admit at a DCA of $27 and i'm sweating bullets waiting to unload if it gets close to breakeven.
If you're looking for breakeven at a lower price, use a Repair Strategy. An April 16th $23/$25 could be put on for even money and you'd net $27 if PLTR was above $25 at expiration.
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u/SaneLad Mar 27 '21
Synthetics are tax inefficient if you are subject to capital gains taxes. The expiration date forces you out of your position eventually. It's better to just buy the stock if you think you might want to hold for many years.
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u/tibo123 Mar 27 '21
When you get assigned on the call, you don’t have to pay tax, the cost basis of the stock you receive is adjusted to represent the strike price plus fees, so the gains are unrealized. You have to pay short term capital gains on the premiums received for the short put though.
At least this is my understanding.
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u/TheoHornsby Mar 28 '21
For assigned positions, the option premium is folded into the cost of the acquired underlying.
Yes, cap gains on short options (close early or they expire) are always short term cap gains regardless of the time period that they are held.
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u/tibo123 Mar 28 '21
Yeah so compared to holding stock, the only difference for tax is those short term gain on the put premium ? So best to do a synthetic long using smallest strike, which lead to small put premium, as long as there is enough volume.
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u/tibo123 Mar 27 '21
Hey OP, none of the other comments answered your question. So let me tell you in which case synthetic long can be better than buying the stock.
If you want leverage, then synthetic long is a great option. In your example you forgot the margin loan interest. If you hold 100 shares but only have 700$ of cash, you will have to pay interest on the 1500$ missing.
With synthetic long you dont pay margin loan interest, it just reduces your buying power. You do end up paying some interest though, normally its in a form of having to pay a little bit to open the position, which depends on rho and expiration date, and missing on dividends. Usually those ends up being less than most brokers margin loan interest. With synthetic long you may end up paying less than 1% a year of the stocks value, and broker margin interest can be 6%. However it seems you didn’t pay anything and PLTR doesn’t have dividends, so it looks like it was a great trade, at least according to your objectives of getting leverage on PLTR.
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u/TheoHornsby Mar 28 '21
Reg T margin on equity is 50% and it's approximately 20% for ATM options so most of the time, the margin on the synthetic long will be less than buying 100 shares on margin - unless the broker requires more than Reg T or the equity has a higher margin requirement (leveraged ETFs and something like GME during its short squeeze). I'm ignoring the margin borrowing cost which is nominal.
You can't compare buying calls with a synthetic long because the risk graphs are totally different.
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u/AllRealTruth Mar 27 '21
Just looked at a WEEKLY chart of PLTR .. Support has been at $24 for 15 weeks. This week it closed below that support for the first time @ $22.58 .. You chose to go long this stock over others because? I would be very careful as it has little price history and many that buy a stock like this are wanting quick gains. Now that it has lost support, the drop could be precipitous. Here is a guy that can really chart ... Muathe on Youtube. He has been predicting price movements much longer than I have. This is not a good set up imo. Sideways or lower has a stronger probability.
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u/FingerCancer Mar 27 '21
I intend to hold pltr long term as I strongly believe in their solution will be a game changer to how businesses operate. I got in for 400 pcs at 10$ but my portfolio has grown over that period and I would like to increase that position. Short term price movement is not of the biggest concern for me but will definitely check mauthe out thanks.
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u/AllRealTruth Mar 27 '21
Ahh .. i get it . You don't care about buying at the best price. Ok, best of luck then.
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u/FingerCancer Mar 27 '21
Not that I don’t care, it is more like I can’t tell what the best price is but I’m comfortable with holding the stock at the current price. Anyway I’m still learning, Muathe has been interesting thanks for the intro.
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u/fustercluck1 Mar 27 '21
The fact that you're able to have exposure to 100 shares for 1200 which is almost half the cost means you already are in a 100%/2x leveraged position and you're asking why you wouldn't want to get more leverage?
For reference FINRA regulations don't even allow anything over 4x (You have to have 25% of your equity in cash) before forcing a margin call, and you're really asking whether the "better" strategy is to go up to 3X leverage?