Merits of synthetic short call with long call

[destriero]

yeah i already closed it for 434 profit. but that was offset by the -400 loss in calls and the closing of the 197.50 put to a 197 put. all in all, wouldve been profitable, if i hadnt bought the calls.

I guess the reason to short shares instead of longing a put is to not deal with the theta decay.

Your put was fairly deep ITM; like 70D. Look to the same strike call (200 call) to determine whether you can stomach the terminal value. IOW, if you're looking to buy the 200 put at 3.30, and the 200 call is trading 0.30 (197 SPY, no div), then can you live with $30 in decay to expiration?

This is really simple, basic stuff. You need to read one of those books and then read it again.

 

[badlucktrades]

The ability to stress test is important, but few people model a change in the vol (strips, across the strikes). Most notably on the downside. So they look great out to 1900 SPX, but don't model the rise in vol should we drop 50-60 handles to get there.

Price the individuals on the at the money strikes. You will know there is a $1.00 div if SPY is trading 198 last and the 198 call/put straddle is priced at 4.50x5.50 (10.00 straddle, 1.00 div). Again, solving for the div(or carry) via parity.

if spy closes at 198, and the 198 straddle is 10.00 how does that show a $1 dividend? is thar being taken off of the call price?

 

[badlucktrades]

yeah the short put was ditm, but that was offset by the short stock? and the put would still continue to decay in price until it only had intrinsic value left and if at expiration, it would just cover my short shares for the spread?

Your put was fairly deep ITM; like 70D. Look to the same strike call (200 call) to determine whether you can stomach the terminal value. IOW, if you're looking to buy the 200 put at 3.30, and the 200 call is trading 0.30 (197 SPY, no div), then can you live with $30 in decay to expiration?

This is really simple, basic stuff. You need to read one of those books and then read it again.

 

[destriero]

1) This is my point; you need work the basics, so my continuing ad nauseam isn't going to do much. You ask, I answer, and then you ask again.

The straddle components; the 198 put and call. The difference between the put and call, less ITM value, = the dividend. Call – Put = Shares – (Div)

2) So, if SPY is trading 198 with a 1.00 dividend inside the duration of the options:
198C is trading 3.00
198P is trading...?

The answer is 4.00. Yes, there is carry (risk-free rate), but let's ignore as it's a much smaller impact. The put has the dividend embedded in its premium as the shares will trade nominally ($1.00) lower as a result of the dividend ex.

Suppose the put and call were trading at 3.00, equal, with a $1.00 dividend going ex prior to expiration. You would be able to buy the shares, sell the call, and buy the put at 198. You would have no risk as the short call and long put are equivalent to short 100 shares of SPY.

Additionally, you would receive the dividend payout on your long (natural) share position of $1.00. The trade would net a riskless $1.00 (less comms) by expiration. At expiration, the constituents would be assigned/exercised to null position.

That is how the arb works. You would receive some riskless gain if the dividend was not reflected in the put's value (over implicit P/C parity).

 

[badlucktrades]

ok so another question, ultimately you have to be right in the direction. So how does understanding parity play into this and benefit in profitability?

also

https://www.tradingview.com/x/aeZhg4u3/

this today made me laugh....this run from 191 to 193....its like...someone is intentionally trying to blow these strikes out of the water...

just watching the one minute chart after putting on some spreads..you kind of wonder whether someone is trying to take out the strikes with the most open interest.

 

[badlucktrades]

also look at my last 1 hour of trading....been doing this every friday for the last month. pretty big roller coaster..

 

[longthewings]

ok so another question, ultimately you have to be right in the direction. So how does understanding parity play into this and benefit in profitability?

also

https://www.tradingview.com/x/aeZhg4u3/

this today made me laugh....this run from 191 to 193....its like...someone is intentionally trying to blow these strikes out of the water...

just watching the one minute chart after putting on some spreads..you kind of wonder whether someone is trying to take out the strikes with the most open interest.

That size move is just about in-line with what you'd expect in a ~30% realized vol market over 1 hour. I think you may be creating a story that isn't there.

 

[i960]

The ability to stress test is important, but few people model a change in the vol (strips, across the strikes). Most notably on the downside. So they look great out to 1900 SPX, but don't model the rise in vol should we drop 50-60 handles to get there.

On top of that many in the retail crowd are shorting piles of OTM "high-probability" positions 15% type stuff waiting to both get fucked by gamma and vega when things go wrong.

 

[badlucktrades]

That size move is just about in-line with what you'd expect in a ~30% realized vol market over 1 hour. I think you may be creating a story that isn't there.

so did you make money on that expected size of a move?

Are you saying it was expected to happen in the last hour?

 

[longthewings]

Actually I gave back a bit of what was a profitable day for me on that move. Note that I said nothing about P&L before. My point was that the move itself was not unreasonable based on current market conditions.

I make no prediction about direction, and while I have to make some judgment call on timing (via my choice of expiration), by no means am I capable of being that granular (to the hour). I price and hedge vol using what I believe to be a reasonable forecast and adjust my various risk exposure as needed. But to some extent, yes vol usually tends to pick up in the mornings (open to Euro close), slow down for a few hours in the middle, then pick up again in the afternoons. In this market especially, there is a lot of vol-of-vol. This means hourly realized vol patterns might look like this:

30%....45%....10%....5%....5%....25%....40% (made up numbers, just painting a picture)

So please don't misconstrue my original comment as me bragging that I knew what the market was going to do. I had no idea. I'm just saying that it doesn't stand out to me as anything of significance based on the volatility regime we currently find ourselves in.