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Option Synthetics

Discussion in 'General Discussion' started by tom, Jun 26, 2014.

  1. tom

    tom Administrator Staff Member

    I'm going to be presenting at the Options Tribe on July 8th and talking about Option Synthetics. I'll be covering the basics of course, C=U+P, and show how you can achieve the same trade using a different combination of options and/or underlying.

    I was thinking of covering some or all of these topics:
    - Why a covered call has the identical risk as a short put
    - Why the risk is identical if you use puts or calls to create a vertical spread
    - How to setup a box trade to get out of an illiquid position
    - How to use synthetics to effectively buy/sell an index

    What do you think? Is there something else you'd like me to go over with Option Synthetics?
     
  2. RayM

    RayM Well-Known Member

    What do you think? Is there something else you'd like me to go over with Option Synthetics?
    Great topic, here are a couple things you might share/stress


    - Option Synthetics

    Start with a stock and apply options - synthetic option
    Start with an option and apply stock - morphing an option

    - Why the risk is identical if you use puts or calls to create a vertical spread
    Ease/difficulty of ITM fills & width of Bid/Ask spread of ITM options/legs

    Lastly, let's not forget to mention possible Dividends and possible early assignment nuance concerns.
     
  3. tom

    tom Administrator Staff Member

    Thanks Ray! I was going to mention the ITM vs OTM for verticals. Slippage and risk of assignment for short ITM options especially. Dividends aren't much of a concern if you're trading indexes, but certainly are if the underlying is a dividend paying stock.
     
  4. Trader G

    Trader G Well-Known Member

    I think the use of risk reversals/combos would be a great conversation, especially as a stock surrogate or as a way of getting long/short an index. There are so many variations, I am finding by tweaking the put/call set up I can get the delta profile like I want, limit risk on the downside and earn theta if the stock just sits there. Buying a back month itm call, selling a couple of put verticals (to cover the theta) makes a pretty good stock surrogate and can earn a small amount if it just sits.
     
  5. RayM

    RayM Well-Known Member

    Trader G, I am intrigued by your post and need a little help...
    - reversals/combos
    Are you referring to shared strike, split-strike, or both ?
    - There are so many variations, I am finding by tweaking the put/call set up I can get the delta profile like I want, limit risk on the downside and earn theta if the stock just sits there.
    Could you please share some examples of these tweaks
    - Buying a back month itm call, selling a couple of put verticals (to cover the theta) makes a pretty good stock surrogate and can earn a small amount if it just sits.
    Could you please expound on this some more as I don't follow but would like to.
     
  6. Trader G

    Trader G Well-Known Member

    Sure, say you are bullish on twitter ( I am not so this is just an example). Buy the Sep 35 call sell 2 of the Aug -39/+36 put spreads. Shows slightly neg theta right now but if you look at the graph you will see if it just sits here down to 39.5 you will make a little bit as the theta bakes off (based on Aug put expiration). This gives you 78 or so deltas with a positive gamma to the upside so you can treat this as a stock purchase and then hedge or trade around this position as you would stocks. Change the months you are using for the calls/puts or change the use of the vertical side (maybe buy a call spread instead of naked call) and the alternatives are endless.
     
  7. RayM

    RayM Well-Known Member

  8. Trader G

    Trader G Well-Known Member

    For some reason my TOS wasn't adding in the put credit spread delta. But your picture is correct, and as you see it is very similar to the stock. There are a lot of variations that make it a pretty interesting synthetic trade.
     
  9. tom

    tom Administrator Staff Member

    I have my slides done. If you go to the main web site, there's a new banner at the top to get the slides for tomorrow's presentation. Here's the outline of what I'll be covering:
    • Put Call Parity
    • Synthetic Covered Calls
    • Collar versus a Vertical Spread
    • Buying or Selling an index, future or stock using only options
    • Synthetic underlying positions with different strikes
    • Rotating the Risk Chart
    • Creating a Box

    Tomorrow's Options Tribe meeting is unfortunately a members-only session but I'll record it and post it on our web site if you can't make it!
     
  10. tom

    tom Administrator Staff Member

    RayM likes this.
  11. ACS

    ACS Well-Known Member

    It turned into an even better presentation than expected with the tips on execution and prices.
     

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