my rimm synthetic call

[scriabinop23]

Quote from jrlvnv:

to the people asking on why he didn't just buy a call. The NOV 95 calls were down 1.00 which would of lost him 100 dollars on that trade. He lost 175 on his long but made 135 on his put, putting him down 40 dollars instead of a 100. So can someone tell me why just buying the call would be better?

They are EXACTLY the same. If you are trading the same deltas, then put+stock=call no matter what.

95 call has higher deltas, is more sensitive to movement in the underlying.. ie has 60 delta... (which means the delta of the 95 put would be -40, +100 for the stock). 100 call might have lower deltas, ie 40 (vice versa, 100 put might have -60 delta, combined with underlying stock to equal 40 delta).

you can make any combination you wish to get the desired result, thus synthetic. Hell you could buy a 90 put with -30 deltas and 40 shares of stock to net +10 delta. That could be synthetically the same as a 110 call, for example.

disclaimer: all deltas in my examples are off the top of my head and probably wrong ... look to your optiontrader to get the real #s. I'm just making a point.

 

[atticus]

Quote from cashmoney69:

Yes, I could have just bought the call, but the premiums are high and didn't want to risk that much, so at the time i guess I was thinking I'd rather just pay a little more in commission instead.

You did buy the call, and paid too much. P/C parity is defined by volatility-equivalence. You paid the market in the stock as well as double commish. Puts are calls, calls are puts... just add stock. This isn't a hobby, don't treat it as such. Never trade the synthetic unless there is edge in doing so.

 

[spindr0]

]I just wanted to try something different. And plus with this strategy, I could profit either way..just close out one position and ride the other to a reasonable profit..at least that would be the idea. Yes, I could have just bought the call, but the premiums are high and didn't want to risk that much, so at the time i guess I was thinking I'd rather just pay a little more in commission instead.

If RIMM drops and you cover your long put for its profit, you are then unprotected on your RIMM and will have a larger paper loss than the gain that you booked on the put. At that point, you must either buy a lower strike to maintain protection or you must be clever enough to time a rebound. If you were clever enough to time moves on RIMM, you wouldn't need protection in the first place. So that means that you will be rolling down your protective puts, pulling out realized gains while racking up larger losses on the stock. Hopefully, you eventually get a large enough bounce in the stock to make up the net loss and eventually profit.

Why does the downward paper loss exceed the realized gain? If you are buying OTM puts on a 1:1 basis to protect the stock, your loss can be a maximum of the distance to strike plus part or all of the put's premium. Ignoring B/A slippage and commissions, that adds up incrementally for every roll down and/or out.

 

[neophytenate]

It seems to me that we've had this conversation before, eh Spin? Coach?

 

[spindr0]

Yes, I could have just bought the call, but the premiums are high and didn't want to risk that much, so at the time i guess I was thinking I'd rather just pay a little more in commission instead.

Let's try a simplistic example, ignoring carry costs, B/A spread, dividends, etc.

Suppose RIMM is 100 and the 100p and the 100c are $1 apiece.

100 shares of stock plus 1 long 100 put costs $101.
1 long 100 call costs $1.

Now calculate what the profit or loss will be at any stock price at expiration. You'll find that they're exactly the same for either position.

In reality, calls are more expensive than puts because of the carry cost. IOW, had you bought the call, the cash that you used to buy the stock would have been earning interest for you. You gave that up. If you do the math, barring mispricing in the options, the call isn't more expensive and there's no advantage to doing the synthetic over the single option. By doing the synthetic, you incur more commissions and have add'l B/A spreads to pay.

 

[spindr0]

It seems to me that we've had this conversation before, eh Spin? Coach?

LOL. Yep. But I think that the all time winner is "Why are there two option symbols for the same strike?"

 

[cashmoney69]

So if someone is bullish on a stock, why even bother with a synthetic call?..seems like it's just more more to pay up front for the same thing. At least thats what it seems like.

 

[spindr0]

The NOV 95 calls were down 1.00 which would of lost him 100 dollars on that trade. He lost 175 on his long but made 135 on his put, putting him down 40 dollars instead of a 100. So can someone tell me why just buying the call would be better?

When you do these calcs, you have to use the respective B/A's of the components and the quotes must be real time. Last trade and closing quotes can be inaccurate since the time of a trade in one option might not correspond to that of the other nor to the price of the stock.

If done in real time, you won't see such disparities.

Closing quotes

 

[spindr0]

So if someone is bullish on a stock, why even bother with a synthetic call?..seems like it's just more more to pay up front for the same thing. At least thats what it seems like.

Good question (a light bulb moment?)

But what if you have gains in the stock (or long call), you're still bullish and you want to stay in the position but you want to protect some of that gain?

Hmmm... Could a legged in synthetic have some use?
(scratching my head :>)

 

[cashmoney69]

Quote from spindr0:

Good question (a light bulb moment?)

But what if you have gains in the stock (or long call), you're still bullish and you want to stay in the position but you want to protect some of that gain?

Hmmm... Could a legged in synthetic have some use?
(scratching my head :>)

So a synthetic call is best done when a reasonable gain has already been established. I see.