The Reverse Conversion as a Stock Substitute

Intimidating title, isn't it? It's really not that complicated as I will explain.

I talked yesterday about taking profit on AAPL while still staying in the game. Let's look at yesterday's example using today's prices.

A reverse conversion means being short the stock, long the OTM call and short the OTM put. That is a professional trader's strategy and not for the average investor. What I want to look at is selling your long stock at a profit and substituting it with a reverse conversion.

We posited yesterday that you own AAPL stock and have had a nice run up. You want to ring the cash register yet still be willing to buy AAPL back at a lower level or keep making money if AAPL continues to move higher.

You can sell AAPL right now at 483.75 and buy the November 520 call at 6. You finance that purchase by selling the 450 put at 7.50. for a 1.50 credit. If AAPL stays between 450 and 520 you make the 1.50 credit. If AAPL moves above 520 you make a lot of money because you own the 520 call for less than free. If AAPL moves below 460 at expiration you are assigned on the short put and buy the stock back that you sold at 483.75 for an effective price of 458.50.

You can even tweak the position by buying the 430 put at 3.50 and selling the 540 call at 4. Now, if assigned on your short put you own the stock at 458.50 with a protective 430 put under it. If the stock stays between 450 and 520 you make 2 points. Your maximum profit is an expiration at 540 in which case you make a whopping 21.50 or $2150 for each time you do the trade.

So, we see that a reverse conversion is a viable stock substitute strategy. There. That wasn't too difficult, was it?