Quote from jones247:
My aim was Not to compare a synthethic call with a natural call, as I recognize the greeks are the same.
What I was trying to do was compare an option leg with a stock position(obviously my attempt was poor). For example, is it better to have a long put & a long call or a long stock and a long put? Although having the long stock position instead of the long call would reduce the impact of theta & a drop in IV, on the flip side it looses the benefit of delta & gamma...
Am I wrong here??? Nonetheless, which is better, especially considering the leverage factor...
Walt
Walt, in your message you kept comparing a "long straddle" with a "synthetic straddle." You didn't say anything about comparing an option with stock.
But if that's what you meant - if you want to compare the advantages of being long calls to being long stock - basically it goes like this.
If you're long stock, your delta never changes. When the stock goes up x amount, you make x dollars. When it goes down x amount, you lose x dollars.
Now, wouldn't it be lovely to have a stock with a delta that magically changed in the direction that was favorable to you? Where if the stock went up $10 you make $7, but if it goes down $10 you only lose $3?
Well, that's what you get when you buy an option. The name of that property is gamma, and that's what you're paying for when you buy an option. Positive gamma is the magical property wherein you make more and more money as IBM goes in your direction, and lose less and less money as IBM goes against you.
If you're long an ATM IBM call and IBM goes up a buck, you make about 50 cents. If it goes up another buck you make say 55 cents. If it goes up another buck you make say 60 cents.
If IBM goes up far enough you'll make a dollar for every dollar IBM goes up.
But if, instead, IBM goes down a buck you lose 50 cents. But if it goes down another buck you'll only lose say 45 cents. And if it goes down another buck you'll only lose say another 40 cents.
And if IBM goes down far enough your option will become worthless, and then further drops in IBM will produce no additional losses at all.
If you own options and start out with a delta of zero, then you'll make money when IBM goes up, and you'll make money when IBM goes down. All IBM movement is good. Which is to say, all volatility in IBM is good. Which is to say you own volatility in IBM. You have bought IBM volatility. Or you could say you own IBM gammas. Different ways of saying the same thing.
That's a wonderful property, that gamma. But like all the finer things in life, it doesn't come free. That's why you have to pay for time premium. That's why you have to pay for gammas, for volatility.
