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Shorting Stock at 1/4th The Price? Our Synthetic Short Stock Strategy - YouTube
Channel: Option Alpha
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Hey everyone.
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This is Kirk, here again at optionalpha.com.
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In this video tutorial, we鈥檙e going to help
you understand how you can go synthetically
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short a stock position with about 1/4 of the
capital that's typically required using options.
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While most traders don't know that you can
typically short stock, there are many situations
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where using short stock can be beneficial
in neutralizing your portfolio if it gets
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too long or you鈥檝e got too many bullish
positions in your portfolio.
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However, shorting stock outright is very capital
intensive with margin.
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And today, we鈥檒l show you how you can use
options as a way to go synthetically short
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a stock with 1/4 of the capital requirement.
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How do we actually do this or setup this strategy?
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Well, it鈥檚 actually pretty easy.
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Basically, what we鈥檙e going to do is we鈥檙e
going to buy an at the money put option which
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is as close to where the stock is trading
right now as possible and at the same time,
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right across the option chain, we鈥檙e going
to go ahead and sell an at the money call
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option at the same strike.
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This will ideally get us synthetically short
the stock at that strike price.
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What鈥檚 the risk?
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Just as with a traditional short stock position,
you do have unlimited risk should the stock
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continue to rally higher into expiration.
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We鈥檙e not trying to change anything here.
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We鈥檙e just trying to use our capital a little
bit more efficiently, but create the same
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profit and loss diagram.
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As far as profit potential goes, because you
are emulating a short stock position, you
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have an unlimited profit potential up until
expiration of the options that you trade.
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Assuming that the stock goes down, really,
it鈥檚 limited to the stock going to zero
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of course.
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Breakeven points are pretty easy to calculate
with this trade.
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You basically take the long strike price and
you subtract out the debit that you paid.
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If you received a credit, you would take the
long strike price plus the credit that you
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received in doing the strategy.
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Let鈥檚 go to our broker platform here on
Thinkorswim.
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We鈥檙e going to use GLD.
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We鈥檝e used this one for another video as
well just because the stock is really, really
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high right now and we could see ourselves
shorting something like this or at least getting
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bearish on a trade like GLD.
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If we go into our analyze tab, we can look
at shorting the shares outright.
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The stock is trading about 124.93, so we鈥檙e
just going to round it up to about 125 to
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make the math a little bit easier for everyone
on this video.
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You can see as soon as I hit confirm and send,
if we were to short the shares outright at
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125, 100 shares, it would cost us as far as
our buying power reduction about $12,500,
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so pretty capital intensive to be able to
do this type of position.
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It reduces our buying power dramatically in
this trade.
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One of the ways that we can do it on the other
side is to go ahead and use those short options.
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What we鈥檙e going to do here is we鈥檙e going
to buy an at the money put, we鈥檙e going
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to buy the at the money put that's at 125
and then we鈥檙e going to go across the chain
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here and do the exact same strike price, only
this time, we鈥檙e going to sell the call
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option.
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In this case, we鈥檙e going to go synthetically
long and you can see it's just a $.7 debit.
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When I hit confirm and send for this trade,
you can see that the cost of this trade here
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is basically $9.50 that we鈥檙e going to receive
as a credit here, but really, what the broker
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is going to hold in margin is $2,700.
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This is obviously a lot less than the $12,000
that it was going to cost us originally to
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sell the shares short, so you can see how
using this type of option strategy is really
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beneficial in reducing the cost of selling
these shares short and going bearish on the
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underlying stock.
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Some of the key takeaways are that these are
great alternatives to shorting the stock outright
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because they carry such a low capital requirement,
but don't let the smaller investment blind
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you to the massive risk that you're still
taking with this strategy.
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With this strategy, we鈥檙e trying to replicate
the profit and loss diagram of a short stock
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position.
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This doesn't mean that we are taking less
risk.
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It just means that we鈥檙e using less capital
to get into the position.
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We鈥檙e leveraging the power of options to
create this strategy.
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It does not mean that we鈥檙e taking less
risk, so make sure that you understand how
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that all works out and where you can and can鈥檛
lose money as the stock trades in the future.
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As always, I hope you guys really enjoy these
videos.
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If you have any comments or questions, please
ask them right below in the lesson page.
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Until next time, happy trading!
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