so i'm thinking this for the long term if the share price just gets overvalued for a long time, i want to get some in shares now. SO basically i'm planning for 1/3 all time in, 1/3 coverd cash put, 1/3 for when shit hits the fan and crashes way more so i can lower my average cost (probably just buy in at market)
Joining the CME gang
- Thread starter hilmy83
- Start date
so i'm thinking this for the long term if the share price just gets overvalued for a long time, i want to get some in shares now. SO basically i'm planning for 1/3 all time in, 1/3 coverd cash put, 1/3 for when shit hits the fan and crashes way more so i can lower my average cost (probably just buy in at market)
i don't understand what the hell you just said in that first paragraph. i literally just learned about options like few weeks ago..
i want to play both the dividend income and premium along the way when market is stupid bullish..
i gotta see some math examples ..maybe you're right. just doing 3 contracts option..makes around $300..
damn....
problem is if the fair value of KO is at $47, then i don't feel like doing covered put ITM, with the risk of owning the stock at fair value without any discount.
i could do way OTM, but it's peanuts, so i think 1/3 in shares all time, at least gives me some upside.
DEST, tell me my method makes any sense damn it.
A quick primer on conversions.
The difference between a call and a put? Shares.
Long call = long shares + long put (synthetic long call).
Long put = short shares + long call (synthetic long put).
It's termed a conversion because you can "convert" a put to a call and vice versa.
The conversion arbitrage results in zero exposure (outside rates): long shares, short x-call, long x-put. You're long natural shares and short "synthetic" shares. Same strikes on both. Why do it? Generally there is no edge in trading the conversion--its utility is in keeping pricing in-line.
A long put/short call at x-strike = short shares (synthetically).
You can price carry and divs via the synthetic as it's embedded. Therefore a large present dividend will result in a synthetic trading under natural shares.
KO has very little vol so there isn't much to gain by shorting say the 50P out to June 26. The call and put at the same strike have to price at the same volatility.
You're only receiving $0.25 in the 50C for Jun26 so that's the extrinsic premium in the 50P. IOW you're only getting an additional quarter ($25/contract) to sell the put over buying shares. The risk on the short put is reduced by only a quarter, but you're upside in KO is limited to the premium in the put, or $340 (one lot/100 share=).
The difference between a call and a put? Shares.
Long call = long shares + long put (synthetic long call).
Long put = short shares + long call (synthetic long put).
It's termed a conversion because you can "convert" a put to a call and vice versa.
The conversion arbitrage results in zero exposure (outside rates): long shares, short x-call, long x-put. You're long natural shares and short "synthetic" shares. Same strikes on both. Why do it? Generally there is no edge in trading the conversion--its utility is in keeping pricing in-line.
A long put/short call at x-strike = short shares (synthetically).
You can price carry and divs via the synthetic as it's embedded. Therefore a large present dividend will result in a synthetic trading under natural shares.
KO has very little vol so there isn't much to gain by shorting say the 50P out to June 26. The call and put at the same strike have to price at the same volatility.
You're only receiving $0.25 in the 50C for Jun26 so that's the extrinsic premium in the 50P. IOW you're only getting an additional quarter ($25/contract) to sell the put over buying shares. The risk on the short put is reduced by only a quarter, but you're upside in KO is limited to the premium in the put, or $340 (one lot/100 share=).
To add; say you want to gain exposure to KO out to Jan 2021. You short the Jan 55P at $1 over intrinsic. Not a lot of cash for limiting your upside, but always a better risk than owning shares outright... in this case, $1/share lower risk. Obv your upside is limited to $55 on KO. You do not participate in the upside beyond the strike.
I ran a portfolio of pseudo-flies in my IRA for decades (am 53yo). Long shares; short two up/out call options, i.e., long GOOGL at 1000; short two (3M tenor) 1100C at $20 per ($40 premium); long one 1200C at $5. It's classically termed a synthetic straddle (and) it's neutral price to where the synthetic is priced proximal to the short strike in time (when stressed). It's a synthetic straddle because the shares take the place of the short put (long shares and add'l short call).
Long shares and short two calls. Dissected: long shares & short call = short put. Short additional call. Equivalent to short call, short put (short straddle).
You're short one synthetic put (long GOOGL shares & short call) and one natural short call. Short the synthetic straddle at 1100.
I would then go long one 1200C (hence pseudo) to allow the structure in the IRA.
That's into the weeds. I made a lot (I mean a lot) of money in those. I prefer it to outright put writing and you can structure it in HY shares and you collect the dividend. Maintaining the short calls deep OTM makes the impact of the div moot (on the OTM strikes).
I ran a portfolio of pseudo-flies in my IRA for decades (am 53yo). Long shares; short two up/out call options, i.e., long GOOGL at 1000; short two (3M tenor) 1100C at $20 per ($40 premium); long one 1200C at $5. It's classically termed a synthetic straddle (and) it's neutral price to where the synthetic is priced proximal to the short strike in time (when stressed). It's a synthetic straddle because the shares take the place of the short put (long shares and add'l short call).
Long shares and short two calls. Dissected: long shares & short call = short put. Short additional call. Equivalent to short call, short put (short straddle).
You're short one synthetic put (long GOOGL shares & short call) and one natural short call. Short the synthetic straddle at 1100.
I would then go long one 1200C (hence pseudo) to allow the structure in the IRA.
That's into the weeds. I made a lot (I mean a lot) of money in those. I prefer it to outright put writing and you can structure it in HY shares and you collect the dividend. Maintaining the short calls deep OTM makes the impact of the div moot (on the OTM strikes).
Last edited:
umm...yea.
i'm like "options for dummies" level. Kind of got what you're saying..but like i said..pure beginner. i just have to spend time reading books on it and watching some videos and maybe practice on demo before i waste time money doing stupid shit
So 53 years old huh? wow. how's that AARP membership going? haha. just kidding you crazy old bastard.
i turn 37 this year, if you can't already tell by my username (it's how kids in the 70s/80s pick their username).
Yeah, I assume you were born in 83. It's nobody's lucky number. I graduated HS in '82 (early).
My point is this: pick shares with decent divs -> pick an expiration you want to short -> pick a strike sufficiently OTM on calls which a) gives you room and b) allows for some decent prem -> buy the shares -> short two up and OTM calls at the chose strike -> buy one call equally OTM = long pseudo/synthetic fly. The OTM short's sensitivity to divs/carry is near zero.
I will show some real-world examples in a bit.
My point is this: pick shares with decent divs -> pick an expiration you want to short -> pick a strike sufficiently OTM on calls which a) gives you room and b) allows for some decent prem -> buy the shares -> short two up and OTM calls at the chose strike -> buy one call equally OTM = long pseudo/synthetic fly. The OTM short's sensitivity to divs/carry is near zero.
I will show some real-world examples in a bit.
There are a few advantages to trading the synthetic straddle structure. You can trade the shares discretely (reduce by odd lots if mkt risk too high), among other advantages. The goal is to collect dividends and have the shares grind higher to neutrality (terminally; to the short strike).
It always outperforms long shares and short puts on the downside. Makes a lot of sense in high vol markets as well. My largest passive structure since 2010. Not blowing myself but I've probably made North of $7MM in the strategy. More than I would have made outright long shares at a much lower haircut.
It always outperforms long shares and short puts on the downside. Makes a lot of sense in high vol markets as well. My largest passive structure since 2010. Not blowing myself but I've probably made North of $7MM in the strategy. More than I would have made outright long shares at a much lower haircut.