Well, after finding this forum a month ago, I finally set up an account. Reason being, I kept getting errors trying to view the last page, and no one had properly answered the question on the first 3. Don gives a accurate but very brief description. I only intend to add depth.
I'll tackle the conversion first, using IBM as the example, currently offered at 88.58. The Jun 90 calls are bid 3.10 and the Jun 90 puts are offered 4.80 The "cost" of the conversion is $0.28 per share, calculated as follows:
outlay 88.58 for stock
receive (3.10) for call
outlay 4.80 for put
Net 90.28 cost
less (90.00) value at expiry
price 0.28 for 'privelege' of being able to short on a downtick
In reality,
you would ask for a quote on the conversion, which might be '$0.05-0.20' in this case. You can sell the position for a nickel, or buy it for 20 cents per share. If you sell the position to open, you have a 'reversal' - the only people I know who do 'reversals' are the traders with huge capital taking the other side of your buy.
Now once you have the position, and you want to be short IBM, you just sell your long stock without regard to an uptick. What you have left is a short call/long put - also known as a 'synthetic short'. If IBM goes up, you are losing money because both option positions are going against you, and you do not own the stock. T
keep in mind this does tie up capital. I only did these in my firms' account, so I do not know the true buying power reduction, but I imagine it could be large. For 500 shares in the IBM example, the outlay is $45,100 (500x$90.20). I do remember getting hit with interest costs for carrying the position too, so there most likely was some margin component to it. (If you really need to know what the true costs are, I would think Don could give that number)
a "bullet" is the common name for a Married Put. If you have a married put, you are long the stock, and long a deep in-the-money put. For IBM, you might have bought the stock at $88.58 and bought the May 140 put for $51.53. Most of the time, however, you deal with a market-making firm that writes a custom put for you, and your only cost is their commission. My recollection is about $50 for a 2500 share "bullet". These custom puts typically expire at the end of the day you enter the transaction.
In either case, conversion or bullet, you 'go short' by selling long stock, and holding an option postion that increases in value when the stock goes down (and loses value if the stock goes up). The advantage to conversions and bullets is that you don't have to comply with the short-sale rules, because you are not short the stock.
WHOA! NOT SO FAST. If you did a 500 share conversion or bullet for IBM, and wanted to be short 1,000 shares, you can not enter an order to sell 1,000. You have to do one of two things: Mark the entire ticket SELL SHORT; or, make 2 tickets- Sell 500 on the first ticket, and SELL SHORT 500 on the 2nd ticket.
I'll tackle the conversion first, using IBM as the example, currently offered at 88.58. The Jun 90 calls are bid 3.10 and the Jun 90 puts are offered 4.80 The "cost" of the conversion is $0.28 per share, calculated as follows:
outlay 88.58 for stock
receive (3.10) for call
outlay 4.80 for put
Net 90.28 cost
less (90.00) value at expiry
price 0.28 for 'privelege' of being able to short on a downtick
In reality,
you would ask for a quote on the conversion, which might be '$0.05-0.20' in this case. You can sell the position for a nickel, or buy it for 20 cents per share. If you sell the position to open, you have a 'reversal' - the only people I know who do 'reversals' are the traders with huge capital taking the other side of your buy.
Now once you have the position, and you want to be short IBM, you just sell your long stock without regard to an uptick. What you have left is a short call/long put - also known as a 'synthetic short'. If IBM goes up, you are losing money because both option positions are going against you, and you do not own the stock. T
keep in mind this does tie up capital. I only did these in my firms' account, so I do not know the true buying power reduction, but I imagine it could be large. For 500 shares in the IBM example, the outlay is $45,100 (500x$90.20). I do remember getting hit with interest costs for carrying the position too, so there most likely was some margin component to it. (If you really need to know what the true costs are, I would think Don could give that number)
a "bullet" is the common name for a Married Put. If you have a married put, you are long the stock, and long a deep in-the-money put. For IBM, you might have bought the stock at $88.58 and bought the May 140 put for $51.53. Most of the time, however, you deal with a market-making firm that writes a custom put for you, and your only cost is their commission. My recollection is about $50 for a 2500 share "bullet". These custom puts typically expire at the end of the day you enter the transaction.
In either case, conversion or bullet, you 'go short' by selling long stock, and holding an option postion that increases in value when the stock goes down (and loses value if the stock goes up). The advantage to conversions and bullets is that you don't have to comply with the short-sale rules, because you are not short the stock.
WHOA! NOT SO FAST. If you did a 500 share conversion or bullet for IBM, and wanted to be short 1,000 shares, you can not enter an order to sell 1,000. You have to do one of two things: Mark the entire ticket SELL SHORT; or, make 2 tickets- Sell 500 on the first ticket, and SELL SHORT 500 on the 2nd ticket.
