More on Synthetic Long Positions

As previously mentioned, I entered a synthetic long stock position using options in Seabridge Gold.

As a recap, a synthetic long stock position is buying the calls and selling the puts to offset the cost the of calls. (If you don’t know what calls and puts are, I suggest you read up on option trading. Options Made Easy: Your Guide to Profitable Trading is a good book).

With $60 I was controlling $1650 worth of stocks, or about 100 shares. On Friday, or about a week later, the stock was up just over a dollar, so I sold 2/3s of the call contracts and all of the puts. On the call side, I netted a profit of $0.40 or $40/contract and on the put side I netted an additional $0.35 or $35/contract. I actually closed out all the puts and kept only 1/3rd of the calls.

If I had closed out the position entirely I would’ve made about $70/contract or about 116% in roughly 1 week. As it stands, since I’ve liquidataed most of the position, I’m now in each call contract at almost cost and I’ll recognize a total net profit when I exit the calls. Currently the calls are selling for $235.

Last friday was also Triple Witching Day, (the contracts for stock index futures, stock index options and stock options all expire on the same day) and historically the week after that in June has a tendency to ended lower. Thats why I decided to close out most of my position. If the stock market does move lower, I can re-enter the position at a cheaper price. If not, then I’ll still make money on my existing call options.

If the stock drops, so long as I sell the calls before they drop under $10-$15, I won’t lose any money. If the stock moves significantly to the upside, the Delta will move towards parity with the stock and I then get most of the upside.

Currently I’m in a good situation. Lots of upside potential with minimal downside risk!

On another note, BHP Billiton (BHP) and Anglo American (AAUK) are hitting new highs! I love my commodity stocks.

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