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I got a call from a friend last week with a very specific question.
"Hey CJ, I saw what happened with NVIDIA stock after earnings and I need to buy some of these shares. Do you think it's worth dropping $40,000 on 100 shares of the stock for my portfolio?"
The concern that he had is one that most investors share when looking at a stock with a high price tag.
It's a situation that a lot of investors run into as stock prices like Nvidia Corporation (NVDA) soar into that stratosphere of higher-priced stock.
To give you an idea, there are about 100 optionable stocks that trade above $300 currently in the market.
Names like Autozone Inc (AZO), Costco Wholesale Corporation (COST), Deere & Co (DE), and Home Depot Inc (HD) are among those stocks that require a hefty investment in order to buy 100 shares for a portfolio.
There's a strategy that I've used for a long time that allows me to build long-term portfolios of stocks that I want to own in a way that can lower the amount invested in each position, I refer to it as a synthetic stock portfolio.
How do I synthesize stock holdings?
Simple, I use LEAPs.
LEAPS (Long-Term Equity Anticipation Securities) are offered as both calls and puts and can be traded on a large swath of the optionable stock universe. They offer the same advantages of shorter-term call options in terms of leveraging moves - both higher or lower - on a stock, ETF, or index.
Why do I like them in this situation? Well, as a long-term bull on NVDA, I would like to add the stock to my portfolio. Of course, the $388 price tag per share would take a bite out of my portfolio's cash if I were to buy 100 shares. Why do I keep talking about buying 100 shares? We'll get to that in a minute.
First, how I set up my synthetic trade using LEAPs.
I'm looking to buy a lot of time, so the January 17, 2025 call options are the expiration I'm going with.
Next, I have to determine which strike price that I want to use for this synthetic stock position. Normally, I will select a strike that it is out of the money with a technical feature that may help to accelerate the price when crossed.
In this case, the $420 strike stands out:
This was the most recent high for NVDA shares. It's about 6% out of the money, so I will be saving a little on a premium over the at-the-money $395 LEAP CALLS.
The technical feature of this price having been the recent highs indicates that there is a chance we will see an acceleration in the price moving higher when we break above that price.
This also means that my $420 option will benefit from that and the convexity of the option going in the money at the same time.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.