Pricing long synthetic for american style option with dividends

R

rambo23

Hi,

I am looking to price Long synthetic on SPDR ETFs such as SPY, which goes to Ex on the day of expiration.

I understand that when i buy the synthetic Long ATM i have more then 1.0 Delta, which means that if the price goes up high enough I will exercise the Call one day before expiration and the Put will probably worth Zero. That leads me to gain the dividend in addition to Profit from my Long synthetic's delta.

But on the other hand i am exposed to either price staying at the same place or a decrease in the ETF's price which will cause the Call to be worth aprox Zero and the Put will worth the intrinsic value + Dividend, this will cause me an extra Loss of the dividend.

I am looking to hedge this dividend Risk, how do i do it in the most efficient way?

Thanks.
 
What leads you to believe that you "have more than a 1 delta" with a synthetic long??

Think about how you would hedge a synthetic long.Are you suggesting you would short more than 100 shares against your combo? I think not

You should only exercise your long call if the dividend > short put + carry..

You cant hedge against a pahantom dividend risk..It doesnt exist in your example
 
Hi,

First of all thanks for responding.

But i have couple of notes regarding your respond:

1. What leads you to believe that you "have more than a 1 delta" with a synthetic long?? Think about a reversal, for this position you are supposed to be delta neutral, but you have interest for the market to rise because if it rises you'll gain the dividend, this means that on your synthetic Long you have more then 1 delta.

2. You should only exercise your long call if the dividend > short put + carry.. I agree but in my example i specifically asked about the SPY ETF which has an EX exactly on the day of expiration, hence all calls will either be early exercise or be worth 0.

Now does my question of how to hedge the dividend risk makes sense?

Thanks,
 
well,you can teach an old dog new tricks..Well done my friend!!
I have been trading reversals and conversions since the 80's,and i was always aware of the implied dividend risk,(looked at it as a spread/fixed amount I was either long or short)but never once looked at the Delta..

If I was buying synthetic long combos in SPY for Dec and concerned about capturing the dividend,I would probably sell a tight upside call spread against the combo...

thanks for the enlightenmnet
 
Hi,

I understand your suggestion of selling upside call spread, but would you hedge the entire Dividend? If yes then that would expose you to a dramatic loss in case the market crosses the spread, it's too much risk for me.

Any other ideas? i understand options, maybe something a bit more complex.

Thanks,
 
I quickly took a look and intentionally did not hedge the entire dividend as you would open up a different can of worms as you pointed out..The wider the call spread,the more of the dividend at risk..Im thinking the short strike needs to be 304/305 or higher if you were long the 300 synthetic..What strike are you thinking

You could buy ".04" delta worth of put/put spreads capped at whatever dollar amount you are willing to sacrifice to protect the div risk...How much of the 1.535 div are you willing to forgo?
 
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