How does a bullet work???

Eldredge,

What you mentioned was banned by the NASD. It was good while it lasted.

Babak,

A bullet is not a synthetic short. It is a hedged long position, nothing else. You cannot profit off the bullet. The profits come when you enter a sale. The long is hedged. Regardless of the market value of the stock your purchase price is secured with the put.
 
[sigh]

can someone please put this to rest with a definitive answer?

Here is my logic:

1]need to profit from stock tanking by somehow being short on a downtick

2]the simplest way I can see is to create a synthetic short which is a long put position with a naked call position

3]BUT!!....I'm told that a "bullet" is what I describe + a long position in the underlying

4]my question is and remains: why do you need a position in the underlying (which you have to sell anyway)? isn't this a rather silly and cumbersome thing to do?

5]why not simply take a synthetic short position WITHOUT the underlying? wouldn't that accomplish the same thing as a bullet?

6]with one difference: no need to purchase stock and then turn around and sell it to create this short position

Anyone??!?
 
Babak,

I'll take a shot at it. You are absolutely correct.

The only reason for having the hedged position would be that you would not have to be short immediately and could have the bullet set up ahead of time for the sake of speed.

If you were to manually set up a synthetic short, you would have to want to be short immediately, determine the appropriate strike prices and execute the option trades. That takes time and a lot of margin.

My understanding of the advantage of bullets at a pro firm is that because of the extra margin, you can execute against the requested bullet before the option positions are actually filled. That way, you are not waiting for the option trades to go through before you can sell the stock (if I'm wrong, someone please correct me). I suppose the firm could just set up the synthetic short instead, but they don't know if you want to be short right away or not. The neutral position just gives you ability to short once you are ready.


Kirk
 
Kirk, thanks for the 'splainin it clears things up

here's an idea: why not have a script to [1] find put/call closes to last traded price of underlying and [2] enter mkt order for both

perhaps that would cause too much slippage (spread of options are killer)

but that would speed up the process. just a thought!
 
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