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options and stk price movement
- Thread starter clarodina
- Start date
Quote from clarodina:
rew synthetic involve buying call and selling put or vice versus right? not comparing synthetic long value and synthetic value but rather the change in synthetic value compared to change in stk price
My point was that both the long and short synthetics were within a few cents of the theoretical value once the bid/ask spread is taken into account. If that is true day to day, as I find it usually is for liquid option chains, the value of the synthetic will indeed track the stock price, modulo the noise from the bid/ask spread. Needless to say, you shouldn't enter a trade unless you are confident you can beat the bid/ask spread and commissions.
If you are seeing deviations from the theoretical value that significantly exceed the bid/ask + commissions, then play "arb for a day" and do a conversion or reversal (as appropriate) and lock in small but risk free profits. You will probably find as I do that such opportunities are few and far between. We're not likely to be able to beat the market makers' computers.
msft return msft 25 synthetic return
11/30/2010 -0.05 -0.09
11/29/2010 0.06 -0.03
11/26/2010 -0.12 0.01
11/24/2010 0.25 0.28
11/23/2010 -0.61 -0.6
11/22/2010 0.04 0.02
11/19/2010 -0.15 -0.19
11/18/2010 0.27 0.26
11/17/2010 -0.24 -0.19
11/16/2010 -0.39 -0.27
11/15/2010 -0.07 -0.08
11/12/2010 -0.41 -0.36
11/11/2010 -0.26 -0.32
11/10/2010 -0.01 0.11
11/9/2010 0.14 -0.04
11/8/2010 -0.04 0.16
11/5/2010 -0.29 -0.37
11/4/2010 0.11 0.06
11/3/2010 -0.36 -0.38
11/2/2010 0.44 0.43
11/1/2010 0.28 0.32
10/29/2010 0.39 0.33
10/28/2010 0.23 0.42
10/27/2010 0.15 0.01
10/26/2010 0.71 0.71
10/25/2010 -0.19 -0.13
10/22/2010 -0.04 -0.01
10/21/2010 0.11 0.02
10/20/2010 0.21 0.24
10/19/2010 -0.72 -0.6
11/30/2010 -0.05 -0.09
11/29/2010 0.06 -0.03
11/26/2010 -0.12 0.01
11/24/2010 0.25 0.28
11/23/2010 -0.61 -0.6
11/22/2010 0.04 0.02
11/19/2010 -0.15 -0.19
11/18/2010 0.27 0.26
11/17/2010 -0.24 -0.19
11/16/2010 -0.39 -0.27
11/15/2010 -0.07 -0.08
11/12/2010 -0.41 -0.36
11/11/2010 -0.26 -0.32
11/10/2010 -0.01 0.11
11/9/2010 0.14 -0.04
11/8/2010 -0.04 0.16
11/5/2010 -0.29 -0.37
11/4/2010 0.11 0.06
11/3/2010 -0.36 -0.38
11/2/2010 0.44 0.43
11/1/2010 0.28 0.32
10/29/2010 0.39 0.33
10/28/2010 0.23 0.42
10/27/2010 0.15 0.01
10/26/2010 0.71 0.71
10/25/2010 -0.19 -0.13
10/22/2010 -0.04 -0.01
10/21/2010 0.11 0.02
10/20/2010 0.21 0.24
10/19/2010 -0.72 -0.6
Quote from Maverickz:
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?
This is quite right, but sometimes there is much better liquidity in an ATM synthetic. Useful for a less liquid UL without too much volatility.
Quote from clarodina:
would buying msft call or put with delta 1 better than taking a synthetic position to match the stk return?
The problem is there is no call or put with delta 1. Very deep ITM options will have delta close to 1 but have low liquidity, so you have to deal with a wide bid/ask spread. Such options of course cost more than near the money or OTM options, but at least you don't have to deal with margin requirements the way you do with synthetics.
Quote from clarodina:
would buying msft call or put with delta 1 better than taking a synthetic position to match the stk return?
See...here in lies the problem with how "outsiders" view options. First it would be pretty damn hard to buy or sell options to get an exact dollar for dollar movement with the underlying. With options however you may gain less looking at dollar for dollar but it will be for a MUCH lower investment which in turn can lead to a much higher % return on investment.
In your hypothetical example of MSFT, to decide what to do an options trader would also need to know a lot more information. Such as where the current Implied Volatility (IV) of the options are in relation to the Historic Volatility (HV or SV) of the underlying, how far we expect the underlying to move and the time frame we expect it to get there. For instance if IV is relatively high we might consider something like a ratio spread selecting strikes that will capture the expected move but still give us some good deltas and near neutral vega to minimize our volatility risk. There are of course many other possibilities but you have to understand how options work in order to fully appreciate how to use them.
if those are closing prices you're wasting your timeQuote from clarodina:
msft return msft 25 synthetic return
11/30/2010 -0.05 -0.09
11/29/2010 0.06 -0.03
11/26/2010 -0.12 0.01
11/24/2010 0.25 0.28
11/23/2010 -0.61 -0.6
11/22/2010 0.04 0.02
11/19/2010 -0.15 -0.19
11/18/2010 0.27 0.26
11/17/2010 -0.24 -0.19
11/16/2010 -0.39 -0.27
11/15/2010 -0.07 -0.08
11/12/2010 -0.41 -0.36
11/11/2010 -0.26 -0.32
11/10/2010 -0.01 0.11
11/9/2010 0.14 -0.04
11/8/2010 -0.04 0.16
11/5/2010 -0.29 -0.37
11/4/2010 0.11 0.06
11/3/2010 -0.36 -0.38
11/2/2010 0.44 0.43
11/1/2010 0.28 0.32
10/29/2010 0.39 0.33
10/28/2010 0.23 0.42
10/27/2010 0.15 0.01
10/26/2010 0.71 0.71
10/25/2010 -0.19 -0.13
10/22/2010 -0.04 -0.01
10/21/2010 0.11 0.02
10/20/2010 0.21 0.24
10/19/2010 -0.72 -0.6
Because of delta, option prices do not track the stock's precisely and with nickel options (not penny increments like MSFT), stock may move a few cents and options don't change. Considering carry cost as well which is larger for more distant months and intraday variance b/tw synthetic and common is likely to be several cents.