How to Create Synthetic SPX Equity Positions Using Options

The biggest threat that a synthetic stock position like this has is Theta risk, or time decay risk. As time passes, SPY would have to move further and further to the downside to create profit for the option trader. In order to illustrate this risk, for this trade to be profitable at option expiration, SPY would have to be below $103.44 just to break even.

This strategy is not new nor is it revolutionary. It is susceptible to market risk, Theta risk and volatility risk, should volatility spike or decline rapidly. This is not a trade that should be utilized for an extended period of time. This type of trade should be used similarly to a swing trade. It works well for traders who do not have the capital to trade the SPY ETF or are unable to control enough stock to make trading it worthwhile.

Through the use of the inherent leverage built into options, one could achieve a return similar to an equity trader that owned 350 shares of SPY while having roughly $1,028 of maximum risk. This is not a strategy for beginners nor is it a strategy that should be employed for long periods of time, but in the right circumstances it can produce outsized profits with a fixed amount of risk.

If you would like to receive our free educational options articles and trading signals please join our free newsletter at: www.OptionsTradingSignals.com

--Written by J.W. Jones.

>To contact the staff member responsible for this article, click here: Cherella Cox.

>To submit a news tip, send an email to: [e-mail].

>To order reprints of this article, click here: Reprints