Property has a valuable place in every investor’s portfolio, especially in times of economic uncertainty.
As an asset class, property is generally considered slightly less risky than stock.
Today, I want to share a strategy where you can use options to gain exposure to the property market without having to physically buy houses or apartments. We’ll use the iShares US Real Estate ETF (IYR) for our example.
The strategy is called a synthetic long stock and it involves selling an at-the-money put and buying an at-the-money call.
IYR Synthetic Long Stock Trade
With the IYR trading at 88.87, traders could sell a January 2022 put with a strike of 88 for around $8.25 and buy a January 88 call for $6.80. Therefore, this January 2022 synthetic long stock trade would generate a credit of $1.45 per contract or $145 in total.
A synthetic long position has a similar exposure to owning 100 shares of the underling ETF. That exposure would cost about $8,887 if the investor bought 100 shares.
Despite the fact this trade can be placed for a credit, the exposure is still large given the inherent leverage in the options.
Even though the option trade generates $145 in premium, the investor could still lose $8,655 if IYR went to $0.
The Leverage Of Options
The advantage of the trade is that an equivalent exposure to owning 100 shares can be gained for only a fraction of the cost.
For this synthetic long position, the margin requirement would be around $2,300 so the investor could use the leverage power of options to trade multiple synthetic long positions with the same amount of capital required to purchase 100 shares.
Of course, leverage is a double edge sword and if the ETF drops, losses will be magnified.
This strategy can be used on any stock or ETF, not just IYR. Just be careful to watch your exposure and not take on too much leverage.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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