Options Synthetics Question

R

rtudor

I have a question about calculating the value of the squash/combo

Say for instance:

97.50-97.625 Call Spread is trading 4 and futures are trading 97.58

I know to work out the Put Spread is just the Box - CS: 12.5 - 4 = 8.5
I know the straddle spread is the difference between CS and PS: 8.5-4 =4.5

Where I am confused is how I calculate the squash/combo.

97.50 has 8 ticks intrinsic therefore 97.50C-97.50P = 8
97.625 has 12.5 ticks intrinsic therefore 97.62C-97.62P = 12.5

This is about as far as I get without confusing myself

Any help would be great!
 
97.625 is 4.5 intrinsic on the put side.... future at 58 right?

What's a squash/combo?
 
Last edited:
apologies 4+ intrinsic for the put. Squash/combo is the same as a collar. Long the put, short the call at the higher strike ie. Long 97.50 put and short the 97.625 call. Trying to sort out to to price the individual strikes off this data
 
@rtudor, you can't get the individual prices, unless you have at least one option price....

Right, so a squash/combo is just a risk reversal.... that will trade at 4 (for the call)

Give the 97.50C a value of say 11...,
97.50P = 3
97.625C = 7
97.625P = 11.50
RR/squash/combo/collar = 4 in terms of the call

FYI, must be a very high IV or long term, for that call spread to be so much lower than the put spread...
 
Hi Jack still a little confused though at how you've priced the squash at 4. Let me know if I'm being dense

What we know is the CS is trading 4. From that we can work out the PS: (Box - CS).
We can also work out the Straddle Spread. How are you getting the squash price?
I do get the high IV just a hypothetical trade.

Say for instance its the 97.375/97.625 PS is trading 14 and futures are trading 97.52

From this again... CS = Box - PS (25-14) 11
Straddle Spread : 14-11 = 3

How can we work out the squash/combo/risk reversal?
97.375 strike has 14+ intrinsic
97.625 strike has 10+ instric
 
PS at 14 means CS at 11

Say .375 put is 10... the .375 call is at 24.50 (F-X+P)
.625 call is than at 13.50 (via CS)

Double check with .625 put, which is at 24 (via PS)
.625 call is at 13.50 (F-X+P)

RR/combo at 3.50 for the call...

This is not entirely correct, since you should discount the strikes instead of using the future... but it will do....
 
Thanks Jack I appreciate your help so far. I guess my question is what is the equation we can put in to solve for the RR/combo instead of just randomly putting numbers in. Or am I'm being daft and there is no equation for this. We have to instead make up the strike prices so long as they fit to the Equations:

Low Strike Call + High Strike Call = CS
Low Strike Call - Low Strike Put = Intrinsic (F-X)

And from there we can obviously work out the High Strike Put = High Strike Call + Intrinsic (F-X)

High Strike Put - Low Strike Put = PS
RR/Combo = High Strike Call - Low Strike Put

Mainly trying to figure out a way to quickly compute this with equations but beginning to think you can't.
 
You have to give one of them a value... but mathematically it doesn't matter what value. You can even use negative, because in the end the relationships determine the RR price.

The CS can be equal to the PS, and therefore the straddle-spread will be zero.. but because the future is not in the middle of the strikes, the OTM call will differ from the OTM put.

Just give the ITM call a value of 100...

Then:
OTMput = ITMcall-(F-X) ......... 'X=low strike'
OTMcall = ITMcall-CS
or
OTMcall = OTMput+PS-(F(F-X) .......... 'X=high strike'

But again, you should actually discount the strikes instead of using the future... So that discounted value will be different for the two strikes.
 
You must log in or register to reply here.
Back
Top