I can't parse your first two sentences. Whether a synthetic long is superior to buying two calls depends on what your goal is. If you want a pure leveraged, delta 1, theta = vega = gamma = 0 directional play a synthetic long does the trick. But it works both ways -- if the underlying drops 5 bucks each call/put combination loses $500. Just like for a future, you need margin and the worst case losses are horrid. Buying only calls limits your losses but you are still stuck with dealing with volatility and time decay. Now I suppose you could try to maintain an approximate delta 1 position with calls only by buying 2 ATM calls per 100 shares of stock and then selling them off as the stock rises and buying more as it lowers. (Sort of the opposite of basic vanilla dynamic hedging of options, where you buy and sell stock to match the delta of the options.) But you'd have no control over theta and vega. It sounds to me like its more trouble than it's worth. If you want to make directional plays with options and want to keep your losses bounded, just accept the fact that delta isn't going to be constant.
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options and stk price movement
- Thread starter clarodina
- Start date
I can't parse your first two sentences. Whether a synthetic long is superior to buying two calls depends on what your goal is. If you want a pure leveraged, delta 1, theta = vega = gamma = 0 directional play a synthetic long does the trick. But it works both ways -- if the underlying drops 5 bucks each call/put combination loses $500. Just like for a future, you need margin and the worst case losses are horrid. Buying only calls limits your losses but you are still stuck with dealing with volatility and time decay. Now I suppose you could try to maintain an approximate delta 1 position with calls only by buying 2 ATM calls per 100 shares of stock and then selling them off as the stock rises and buying more as it lowers. (Sort of the opposite of basic vanilla dynamic hedging of options, where you buy and sell stock to match the delta of the options.) But you'd have no control over theta and vega. It sounds to me like its more trouble than it's worth. If you want to make directional plays with options and want to keep your losses bounded, just accept the fact that delta isn't going to be constant.
Quote from clarodina:
for creating synthetic long how to select the strike so the price movement would same with the stk price?
Any strike will do, so long as the call and put have the same strike price. Assuming that margin is about 20% of the strike price of the put, your total upfront cost is lower if you chose a higher strike price, but that increases the odds that the short put will be assigned. When I've done this sort of trade I try to pick the lowest price I think the underlying asset will go, and use a strike price just below that, so I have an ITM call and an OTM put. (The opposite, of course, for short trades.)
rew any strikes would do? u saying any strikes to do synthetic long would have the same price movement like the stk price movement? because different call strike have different delta isn't this would have different price movement compared to the stk movement?
if the put goes itm they would straight away get assigned?
is synthetic long more for long term or short term trading or intraday trading considering the pros and cons?
if the put goes itm they would straight away get assigned?
is synthetic long more for long term or short term trading or intraday trading considering the pros and cons?
Quote from clarodina:
rew any strikes would do? u saying any strikes to do synthetic long would have the same price movement like the stk price movement? because different call strike have different delta isn't this would have different price movement compared to the stk movement?
if the put goes itm they would straight away get assigned?
is synthetic long more for long term or short term trading or intraday trading considering the pros and cons?
I am just curious why you would want to be in a synthetic long trade at all? If you think the stock is going to go up why use a synthetic and expose yourself to the downside risk when you could just buy the call option to limit your downside risk while still maintaining the unlimited upside potential?
Quote from clarodina:
rew any strikes would do? u saying any strikes to do synthetic long would have the same price movement like the stk price movement? because different call strike have different delta isn't this would have different price movement compared to the stk movement?
if the put goes itm they would straight away get assigned?
is synthetic long more for long term or short term trading or intraday trading considering the pros and cons?
Yes, any strike will do. This is just put-call parity. If a put goes ITM it is up to the put owner to decide if he wants to exercise it. Unless the put is very deep ITM or near the expiration date it probably won't be exercised because the put owner would be throwing away the time value if he did that. But there is no guarantee the put owner will be rational. Keep in mind that if you plan to be commonly doing synthetic long or short plays you should consider getting qualified to trade futures and just use them instead, as they are pretty much the same thing -- pure directional plays that can have unbounded losses as well as gains. When you use a synthetic you are throwing away two of the main advantages of simple puts or calls -- bounded losses and no margin requirement. So you should ask yourself -- just how important is it that my trade have a delta of 1 and no time decay or dependence on volatility?
Quote from clarodina:
how to select options that match stk price movement exactly? for options that have delta 1, the movement is not that exact and there is big spread for these delta 1 options and those more itm options have more movement compared to less itm options despite all have delta 1
No time value what's the purpose. Why not keep it simple and just trade the actual underlying?
the gain or loss of synthetic positions do not seems match the stk gain or loss. the different may range from -0.50 to 0.50. This is the same for using options at different strike itm otm or atm
any reasons for the wild differences because synthetic position suppose to be isolated from volatility
any reasons for the wild differences because synthetic position suppose to be isolated from volatility
Quote from clarodina:
the gain or loss of synthetic positions do not seems match the stk gain or loss. the different may range from -0.50 to 0.50. This is the same for using options at different strike itm otm or atm
any reasons for the wild differences because synthetic position suppose to be isolated from volatility
Which prices are you looking at to compare them? Last trade, bid/ask,...?
Quote from clarodina:
the gain or loss of synthetic positions do not seems match the stk gain or loss. the different may range from -0.50 to 0.50. This is the same for using options at different strike itm otm or atm
any reasons for the wild differences because synthetic position suppose to be isolated from volatility
You don't say what the underlying is or what the bid/ask spread is. For liquid option chains and near the money strikes I rarely see violations of put-call parity more than a few cents above the bid/ask spread.
Example: HPQ at 42.14.
$40 Jan call bid/ask of 2.97 / 3.00.
$40 Jan put bid/ask of 0.87/0.89.
With interest rates very low and a dividend yield of about 0.8% the cost of carry is close to 0.
Theoretical synthetic value: 2.14
Actual cost of synthetic long: 3.00 - 0.87 = 2.13
Actual cost of synthetic short: 2.97 - 0.89 = 2.08
That looks pretty close to me.
using the midprice of buy sell price to calculate the change in option call value plus the change in put value assuming buy call and sell put of using same strike. also compare itm otm and atm options. randomly using any stk on s&p500 like amd, adsk, msft. comparision is using recently eod data.
the change of synthetic really didn't match the change in stk price. there are some same return but the different are too much. the change of synthetic value is too eratic with some too much or too little compare to change in stks price.
the change of synthetic really didn't match the change in stk price. there are some same return but the different are too much. the change of synthetic value is too eratic with some too much or too little compare to change in stks price.