MM22 - How to Roll a Synthetic Long (and Why the Math Has to Work First)
Reminder - Not financial advice.
This is one of the most common questions I get, and I completely understand why. A lot of you are sitting on synthetic longs that are underwater, and you want to know: how do I give myself more time without throwing good money after bad?
Let me show you how I analyze rolling a synthetic long. I am going to use Tesla as the example because so many of you asked about it specifically.
Tesla right now is trading right around $360. It is retesting old resistance, which has now become new support. We have fallen below the 200 moving average. We have also closed below that $380 support level. I have drawn in a trendline, and here is the reality: we are either going to break out hard, close back above the trendline, back above $380, and back above $395 (which is the 200 moving average), and we will be off to the races. Or this $355 to $360 support will not hold, and we are heading into the low $300s.
So the question becomes: what can I do to improve my position and give myself more time? The answer is you can roll both legs of your synthetic long forward in time. You can tweak the trade to your advantage and reduce your debit. You can roll the whole package at once, or you can roll each leg individually. I am going to show you each leg separately because I think it will be easier for you to process.
But before I get into the mechanics, I want to be very clear about something. When would I do this? I would do this in a retirement account, because I do not have taxable events there. And I would only do this on a trade that is underwater. When would I not do this? On a profitable trade. If I owned a December 2027 $200 call, I am not rolling it. I am going to exercise it at the $200 price in December of 2027 and NOT create a taxable event for myself.
Now let me walk you through the two approaches I would consider for the call side, and then I will show you how the put side brings the whole debit down to almost nothing.