How to create synthetic leveraged product

C

Chronos.Phenomena

Hi there,

I' trade futures, stock and ETFs mainly.... for a long time... never tried myself in the options space...

go get myself going, I wanted to understand how... in practice... once can create synthetic leveraged product.


For example, I have 1 euro. I want to buy company X and and I want controlled leverage. For example, for one cent increase in price, I want 5 cents increase of my position.... same for downticks...


How to do this trough options?
 
There's no optionality in what you are trying to create. So wouldn't it just be creating a synthetic future (long call and short put) in such an amount that your delta is 5 (or whatever it is that you desire)?

Quote from Chronos.Phenomena:

Hi there,

I' trade futures, stock and ETFs mainly.... for a long time... never tried myself in the options space...

go get myself going, I wanted to understand how... in practice... once can create synthetic leveraged product.


For example, I have 1 euro. I want to buy company X and and I want controlled leverage. For example, for one cent increase in price, I want 5 cents increase of my position.... same for downticks...


How to do this trough options?
More...
 
If you buy the ATM call and sell the ATM put, your net delta should be around 1. Just size it up from there. You'll be mishedged as the underlying moves, but that's the cost you pay. As you why you would want to do that, you'll have to tell us.

Quote from Chronos.Phenomena:

Thanks sjfan,

any idea how to calculate optimal put and call holidings?

can you give an example please?

just want to see how that's done in practice
More...
 
Thanks for response. The reason is as follows... I want to be able to control leverage with much more flexibility and precision than when trading mini futures... For example my leverage is either 50x or no leverage at all... What if my intraday model tells me to reduce leverage from 50 to 20 when it's less certain about the upward potential... I couldn't Implement that without synthetic leverage instrument... I'm starting my homework now.

Thanks

Any other comments are most welcomed
 
Using options will make you guess the future volatility. You can count your deltas but if you are wrong about the volatility your result will vary.

Also when you are using options you need to pay close attention to the gamma. If the gamma gets too big then the delta can get out of control in no time.

To avoid the Greeks you can build your own index buy buying the appropriate quantities of s&p 500 companies shares or hedge yor s&p contract by offsetting with number of shares or another index like the ym or nq or any other correlated index.

Also a calendar spread in the futures contracts might work.

The cost and complexity of managing spreads and hedges might be high for you.

It seems you need more capital.
 
If your underlying is fairly liquid, you can also buy some deep in the money, near term long calls. By choosing deltas very close to one, it is not too hard to get 5-6x leverage. May be somewhat less risky than synthetics; you don't exactly lose dollar for dollar with the calls, and you don't have the theoretically unlimited loss possibility. If underlying not liquid though, you may be better off with synthetics. I don't think either method will control your leverage precisely.
 
Quote from Chronos.Phenomena:

any idea how to calculate optimal put and call holidings?

can you give an example please?
More...
There's nothing optimal to calculate for straight leverage. As sjfan suggested, if you buy the ATM call and sell the ATM put, your net delta will be 1 and if you want 5X upside leverage, do it 5 times. If your inclination is to the downside, reverse it: buy the ATM put and sell the ATM call.

I'm sure you're aware if it but it bears mentioning that leverage is a double edged sword. If wrong, you'll lose 5 to 1
 
Quote from drcha:

If your underlying is fairly liquid, you can also buy some deep in the money, near term long calls. By choosing deltas very close to one, it is not too hard to get 5-6x leverage. May be somewhat less risky than synthetics; you don't exactly lose dollar for dollar with the calls, and you don't have the theoretically unlimited loss possibility.
More...
Unlimited loss is the boogeyman that the establishment tries to scare peeps with. Reality is, you can have a significant loss with either method but hardly a trader practicing good money management rides to infinity or zero.

If the calls are deep enough ITM to have a delta of one, they're going to lose $ for $ initially and something close to it for a good distance. Granted they'll do better in an adverse catastrophic move but in terms of the OP's words, he's a trader looking for a 5 cent increase for a one cent up move and the same for downticks. I assume he's scalping smaller moves since he's talking cents and ticks. If so, the deep ITMs will be counter productive since the B/A slippage will be large.
 
Quote from Chronos.Phenomena:

Thanks for response. The reason is as follows... I want to be able to control leverage with much more flexibility and precision than when trading mini futures... For example my leverage is either 50x or no leverage at all... What if my intraday model tells me to reduce leverage from 50 to 20 when it's less certain about the upward potential... I couldn't Implement that without synthetic leverage instrument...
More...
I'm confused. At 50% margin you have 2X leverage. What is 50x or 20x ?
 
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