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Forget cost of carry in the synthetic, it doesn’t feature here. The $ 3 arb is locked by buying the natural Put. You buy the stock for $ 76.30, you sell the Call for $ 15.10. That’s the synthetic short Put done for 15.10 - (76.30-75.00) $ 13.80. You then buy the natural Put for $...

Actually it wasn’t me, but I agree the $ value. Not necessarily. You’d still derive a forward value, and a cost of carry value. Put-Call Parity. Where the natural must equal the synthetic, else you’d have an arb. In this case the natural Put is priced at $ 10.80 The synthetic is priced...

I'm not referring to > one straddle. I'm referring to how a synthetic equivalent is priced; If you buy 100 shares and sell 2 calls (both ATM) you'd be short 1 x straddle. To derive the value of your 1 x straddle you'd take the call premium / 2. In other words, where the forward is trading...

Yep, else there'd be an arb. Agreed, and goodnight.

The break-even is $ 62.70, calculated thus; $ 75 + (76.30-75.00)/2 = $ 75.65 $ 75.65 – ($ 15.10 + $ 10.80)/2 = $ 62.70 ******* To run a practical example; At underlying $ 62.70 the loss on the long stock will be ($ 76.30 - $ 62.70)= $ 13.60 At underlying $ 62.70 the loss on...

No it doesn't. Run a practical example and you'll see it.

I agree the synthetic equivalent, but not his break-even. It's $ 62.70, see above. Not $ 64.20.

Actually need to add-in the difference between strike and underlying at the time of going long. Break-even is; $ 75+ (76.30-75.00)/2 = $ 75.65 $ 75.65 – ($ 15.10 + $ 10.80)/2 = $ 62.70

But he didn't sell 2 Puts. He received a total premium of (15.10+10.80) $ 25.90, and because of his long position he is now net short 2 Puts. Divide the premium by 2 ?

and the downside loss starts at ($75 – ($15.10 + $ 10.80)/2) $ 62.05. Not $ 50.40. Keep them coming....

How about you two using the PM facility ? Then you can slag each other off 24/7 and nobody will give a sh!t. Cheers.

Unless you know what the future volatility will be, it is impossible to find undervalued options. Options are only undervalued in hindsight, not foresight. Relative mispricing due to Vol skew really is quite small and not a viable strategy for the retail trader paying spreads & commissions...

I had suspected as much, but wanted to check. ABS Vols = absolute ? Would a low vol environment necessarily favour a long correlation trade ? Likewise, would a high vol environment necessarily favour a short correlation trade ? Wouldn't you need to run the numbers to determine the implied...

Reverse dispersion trade, partial index replication; Which stocks to include / exclude in the basket and why ? Where the index is replicated by (say) 25% of weighted stocks, how then would you hedge that position using index options ? In what quantities ? How would correlation be brought...

Gentlemen, please ! Once again you seem to have taken offence when someone (this time Mysticman) points out what he thinks is an error in your thinking. The “saved a bit on commissions” appears to be more than swallowed up on the extra wide spread, not to mention the risks associated with...

Should be the same as DIA else an arb to be had (which won't last for long). How did you balance that against the component stocks, or was that a stand-alone trade ?

I thought the discount was a function of the value of early exercise. And if you can find an instrument with both Amercian & European style options available, you can pocket the early exercise value and take a risk purely on early exercise. For example, short Amercian style xx strike Put...

The vast majority of funds are long equity. Any hedge would involve buying protective Puts or selling covered calls or a combination of both. Thus there is constant buying pressure on Puts and constant selling pressure on Calls which is precisely what causes the asymmetric Vol smile (skew) in...

Yep, Riskarb & MTE have it right. More discussion here; http://www.elitetrader.com/vb/showthread.php?s=&threadid=56688 Be careful you don't fall asleep ! Personally, I prefer to read tea leaves.

Why, what's up ? This is how I'd balance a short dispersion portfolio; feel free to rip it apart... Balanced by $Delta (Contracts Qty x Strike x Option Delta).