We live in an instant-gratification world. Most people want things "right now" and are unhappy when waiting for anything.
That feeling goes double when relating to most stock and option traders, but when almost everybody is focusing on one thing, there's always opportunity in doing the opposite of the crowd. Contrary thinking absolutely pays dividends when applied to investment activities. Consider tech stock Synaptics (SYNA) , which I believe provides a great underlying vehicle for a 25-month trade that's likely to work out brilliantly.
The shares look cheap. As on midday Tuesday, they sat at $39.25, down from an all-time peak of $102.50 and a 52-week high of $64.54. SYNA is also healthy and profitable.
After two years of declining results, earnings are expected to rebound strongly over the next few years. A simple regression to a normalized price-to-earnings ratio on fiscal 2018 projections (SYNA's fiscal year ends June 30, 2018) suggests that a near-term rebound to north of $46 is quite possible. And if Value Line analysts' estimates for the firm's 2020-2022 earnings per share prove accurate, Value Line's three-to-five-year target price range of $60 to $95 for the stock should be reachable (if not exceeded).
This chart shows that SYNA peaked between $64 and $102 during each of the most recent four years (including 2017 YTD):
Now, Standard & Poor's only gives SYNA a "3-star/Neutral" rating, but notes that Synaptics' price-to-fair-value relationship is now among the best in S&P's entire research universe. Standard & Poor's 12-month goal for SYNA sits at $50 a share:
However, Morningstar is more bullish. It assigns the stock a "4-Star/Buy" rating, calling present day fair value as $64:
After all, how many tech stocks can you buy at less than 10x consensus forward P/E? Add it all up and buying SYNA shares outright looks like a good move.
Selling long-term puts also appears to be a winning play. Even the slightly in-the-money January 2020 $40 strike-price put offers a greater-than-20% safety margin:
But the best way to go might be to set up a "buy/write" combination. That involves buying 100 SYNA shares while simultaneously selling a covered call and a naked put at the same strike and expiration date.
Here are the actual end-of-day quotes on SYNA options as of 4 p.m. ET on Monday. (The net cash outlay below applies only if your trades are executed in a margin-type account, using existing free buying power to secure the put option):
There will be only two possible outcomes with the trade above once you reach your options' expiration date -- Synaptics will either be below $40 a share, or trading at $40 or higher. Let's look at the worst-case scenario (SYNA < $40) first.
Worse-Case Scenario
If Synaptics falls below $40 a share on your options' expiration date, you'd be forced to buy a second 100-share lot of SYNA for an additional $4,000. Your final position would be that you'd own 200 SYNA, which you would have bought at a $29.14 average price:
In other word, Synaptics could drop by almost 24% without causing a loss on your whole investment package. While future stock market action can never be guaranteed, we know that holding SYNA at a $29.14 average price would have been a winning position 100% of the time during the past four years:
Best-Case Scenario
Now on to the good stuff. If SYNA merely rises to $40 a share or better by Jan. 17, 2020, we'll achieve the best-case scenario for this set-up:
Your original 100 shares will be "called away," while your $40 put will expire worthless. Traders who followed this program will be ahead by almost 119% cash-on-cash in just 2.1 years, or about 56% annualized. Any move up of 4.5% or better would translate into a huge gain.
How cool is that? Investors who simply bought SYNA shares would need to see a price move to about $83.75 to achieve the same 118.8% gain.
The bottom line: Shake off the "short-term only" mindset. Open yourself up to great returns over longer horizons. If you can make high returns, why not lock them in for as long as possible?
This commentary originally appeared on Real Money Pro at 07:00 a.m. ET. Click here to learn about this dynamic market information service for active traders.
