Married Calls

E

exQQQQseme

This simple strategy consists of:

A. Buying Calls
B. Shorting Stock
In sufficient quantity so that the deltas are neutralized.

Yes, this is a synthetic straddle, but I think there are several advantages to this over a regular straddle. To start this thread I'll mention just one for now.

That is: The theta decay is significantly less because only the calls have theta decay. There are no puts to decay.

Bob
 
Just to play devils advocate why are you choosing to list just one advantage to start the thread? Why wouldn't you say I prefer to do the married call rather than straddle for ALL the following reasons...then allow those who don't or disagree to weigh in. Personally I can't short stock in an IRA so I wouldn't do it. However if you have more than one reason I'd be interested in hearing it.

plus "theta decay significantly less" makes no sense....just because there are no puts to decay???? isn't that irrelevant?
 
Quote from exQQQQseme:


Yes, this is a synthetic straddle, but I think there are several advantages to this over a regular straddle. To start this thread I'll mention just one for now.

That is: The theta decay is significantly less because only the calls have theta decay. There are no puts to decay.

Bob
More...

Not true. To neutralize the -deltas, you will have to buy more than 1 call per 100 shares. Theta bleed is the same whether you have a straddle or a synthetic straddle. The only benefit in using one over the other can be found in the -edge or commissions costs lost as mentioned in the hundred other threads you started on the subject.

Why you refuse to take the advice given to you before is beyond me. Another thread on the subject will not change the pricing model but carry on :)
 
Quote from exQQQQseme:

This simple strategy consists of:

A. Buying Calls
B. Shorting Stock
In sufficient quantity so that the deltas are neutralized.

Yes, this is a synthetic straddle, but I think there are several advantages to this over a regular straddle. To start this thread I'll mention just one for now.

That is: The theta decay is significantly less because only the calls have theta decay. There are no puts to decay.

Bob
More...

Actually, the example of a synthetic straddle you cited actually has a distinct DISadvantage over a regular straddle: higher margin cost.

Under reg T margin, the short stock will take up more margin than the sold option would have.

Retail traders should stick to the plain vanilla straddle: long (or short) calls and long (or short) puts.

I'd second rally's suggestion: get thee to thy local library/bookstore! :-)
 
Richard, the reason I don't list all of the reasons is that there are so many people here who will blast away at anything I say. Just look at what has happened already in the first hour or so, with just one reason.

I would rather defend one theory at a time. So, sticking to this one, the cost of this trade is the theta decay. If I were to buy both a call and a put, both would decay. This way, only the call erodes.

Three things are going to happen:

The underlying will go up, down, or sideways.

Because this configuration has positive gamma, it is profitable if it goes either up or down. Then I adjust to make it delta neutral again. If it goes up, I short additional shares. If it goes down I buy more calls. I find shorting the additional shares easier than buying puts.

Someone, either you or the other gentleman, responded that this cannot be done in an IRA. That's right.

Bob
 
Quote from exQQQQseme:

Richard, the reason I don't list all of the reasons is that there are so many people here who will blast away at anything I say. Just look at what has happened already in the first hour or so, with just one reason.

I would rather defend one theory at a time. So, sticking to this one, the cost of this trade is the theta decay. If I were to buy both a call and a put, both would decay. This way, only the call erodes.

Three things are going to happen:

The underlying will go up, down, or sideways.

Because this configuration has positive gamma, it is profitable if it goes either up or down. Then I adjust to make it delta neutral again. If it goes up, I short additional shares. If it goes down I buy more calls. I find shorting the additional shares easier than buying puts.

Someone, either you or the other gentleman, responded that this cannot be done in an IRA. That's right.

Bob
More...

arrg, but you have to buy twice the number of calls. decay per 2 calls = decay per 1 call + 1 put

-100 shares + 2 calls EXACTLY EQUALS 1 call + 1 put
(accounting for dividends and cost of carry and is worse from a margin standpoint)

Adjustments can be identical. If you buy the call and put and want to adjust by shorting shares instead of buying more puts, great, do it.

Again, please read a book that covers synthetic positions.
 
Smilingcynic, I'm with you all the way regarding the application of Reg. T, especially as it applies to the margin interest charge. I've been shorting stocks for a long time so I have a pretty good handle on how the interest charge works.

If I short a stock and the price of the stock goes down, my marginal cash balance increases. Often I have no margin interest charge. Matter of fact, only interest charge I had since last September was during that price spike in AAPL about 2 weeks ago. My interest charge over period of 6 or 7 days was $12.50. But, I understand what you are saying about the margin interest. And I'll be the first to admit that one should not screw around with shorting stocks at all unless they know all the rules, both margin or otherwise.

I'm really not here to argue. I just like to discuss the subject, especially with people who know what they're talking about. And for sure the three of you fit that description. I have no problem agreeing to a valid point.

Bob
 
Damon, in your suggestion that I read a book on synthetics, do those books merely define the various synthetics, or do they delve into whether and under which scenarios does a synthetic work better than the natural.

If I were going to get just one book, does anyone have a suggestion?

Bob
 
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