How to Turn Your Trading Account Into a 2X $AAPL ETF


Here is a simple formula for turning your trading account into a double leveraged Exchange Traded Fund. (Well not really, you will not be an ETF but you will get very close to the same returns of a 2X  ETF with much less risk).

Let’s say your account is $60,000 and Apple stock is trading at $600 a share for the sake of simplicity. So you will need to control 200 shares to get two times the return and twice the downside of just being long Apple stock.

Let’s say it is Wednesday July 11th, on Thursday morning you could buy 2 contracts of Apple July 21st, 2012 expiration weekly call options for $585 for $1800 each, so for $3600 you will control the full upside of possible profits in 200 shares of Apple stock while still holding a $56,400 cash position and only risking a small percentage of your total account.

The intrinsic value of your call options is $3000 since you have 2 contacts of 100 shares each that are $15 in the money. The cost in time value is $600, your contracts will go down $85 each trading day in theta decay regardless of whether the stock goes up or down each day before expiration. You can also lose the $3000 if the stock falls.

However if Apple took off on a 20 point run on this week before earnings you would receive the full $2,000 in increased intrinsic value and have the other $56,400 to trade as you wish for that week instead of tying up your whole account and margin to be long 200 shares.  After a 20 point run your option contracts that controlled 200 shares would be worth $7,000 (your $600 theta value would have decayed).

This is the basic way I have used options in my trading to create an asymmetric risk profile, limit the capital needed, maximize gains with limited risk, and have out sized returns in a trend with no need for a double leveraged ETF, if there was one though the ticker $AAAAPL would be cool.

(Of course this system can be used with puts to create an Inverse 2X AAPL bear ETF. One draw back is also that it will not compound capital like a 2X ETF but at the same time it will not deteriorate in volatility like a 2X ETF).