Is it possible with calls and puts?

Can calls and puts replicate a barrier like payoff?

  • YES, It can do that perfectly.

  • It can, but with cons. Not worth it.

  • NO, It is impossible.

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MrAgi1

I would like to trade exotics options like barrier options. However, as a retail trader, it is not available and even if it was, poor liquidity would make it untradeable. So can I recreate for example a 'Down-and-in' with regular calls and puts options?

Please can you make your explanation as easy to understand as possible. Also alongside, can you state the cons and pros if any, of using a replicating profile like described?

Thanks for your contribution.
 
MrAgi1 said:
I would like to trade exotics options like barrier options. However, as a retail trader, it is not available and even if it was, poor liquidity would make it untradeable. So can I recreate for example a 'Down-and-in' with regular calls and puts options?

Please can you make your explanation as easy to understand as possible. Also alongside, can you state the cons and pros if any, of using a replicating profile like described?

Thanks for your contribution.
More...

Essentially no. You can replicate a binary with a discrete strip of verticals, but there is a reason that OTC exotics were developed. KO/KIs cannot be (static) arbitraged with vanillas.
 
Let's not forget @Saltynuts contribution to option theory. He may receive the Nobel and Fields prize for this seminal thesis...




https://www.elitetrader.com/et/thre...s-writing-strategy.356446/page-2#post-5333493




"So, an out of the money call has a strike price that is ABOVE the spot price.

An at the money call has a strike price AT the spot price.

An out of the money call has a strike price BELOW the spot price.

With puts, its the same, just reversed.

So, for the ultimate protection, you would sell an in-the-money call and an in-the-money put. The deeper in the money, the more protection. An example.

Stock is trading for $20. You sell a call with a strike of $15 for $5.20, and a put with a strike of $25 for $5.20. So you collect $10.40 in premiums. Stock has to rise or fall *more than* FIFTY PERCENT before you lose a dime. Stock on average (assuming put-call parity or whatever its call, which is not likely the case, but just assuming that for simplicity for example purposes) you win 40 cents, pretty much risk free.

Any further questions?"




I do. Were you switched at birth?






?
 
Not content with just one bday spanking:

https://www.elitetrader.com/et/thre...s-writing-strategy.356446/page-3#post-5333569

Wait, WAT? If you sell at 25 call on a 20 stock, you are going to collect a VERY SMALL premium. Same thing if you sell at 15 put on a 20 stock. That is COMPLETELY DIFFERENT than what I described, and offers VERY LITTLE downside protection, which is WHAT THE OP WAS LOOKING FOR....

Some of you people amaze me... and not for good reasons lol....
 
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