I find this topic of great interest. I believe it's unrelated to a long put vertical. Either its a true reverse collar (short stock at say 58, long 60 call, short 55 put) or it's an interesting way to trade short stock versus long synthetic stock (same as above but with short put at 60 strike also). I'm all ears...
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Reverse Collars
- Thread starter Eliot Hosewater
- Start date
Lowvoltrader, the combination of (a) short100 shares, (b) short 1 Jun $55Put, and (c) long 1 Jun $60Call, is a synthetic Put Credit Spread.
I like this because (1) it's easily adjusted, and (b) unlike a regular credit spread, I don't have to be concerned with the mechanics of early exercise. If exercised early, I am left with the long Call, which even if it expires worthless means that I have achieved Maximum profit.
Also, I never have an account maintenance or interest charge issue as long as my available cash equals or exceeds the value of the short shares in my account.
The profit objective is related to the theta decay.
I like this because (1) it's easily adjusted, and (b) unlike a regular credit spread, I don't have to be concerned with the mechanics of early exercise. If exercised early, I am left with the long Call, which even if it expires worthless means that I have achieved Maximum profit.
Also, I never have an account maintenance or interest charge issue as long as my available cash equals or exceeds the value of the short shares in my account.
The profit objective is related to the theta decay.
Quote from exQQQQseme:
Lowvoltrader, the combination of (a) short100 shares, (b) short 1 Jun $55Put, and (c) long 1 Jun $60Call, is a synthetic Put Credit Spread.
In the options on futures world this is called a risk reversal. A true reversal would be with the put and call at the same strike. Since they're at different strikes, it is no longer a "lock" - there's risk. Hence the name risk reversal.
If you look up "risk reversal" in the index of any options books you have or google it, you may find more info on this.
I don't think that's correct. The short stock combined with short 55 put is equivalent to a short 55 call. Add to that the long 60 call and you get a bear call credit spread which is equivalent to a bear put debit spread NOT a 'put credit spread' (a bullish position).Quote from exQQQQseme:
Lowvoltrader, the combination of (a) short100 shares, (b) short 1 Jun $55Put, and (c) long 1 Jun $60Call, is a synthetic Put Credit Spread.
db
Daddy's Boy...you're 100% right. I made a mistake. Should have said a synthetic CALL spread. Sorry, I should have been more careful and typed what I intended to say.
No question about it. What I displayed is a bearish (or neutral) spread. For sure, I didn't mean to indicate a bullish trade. Sorry about that.
Thanks for the heads up and the correction.
DMO, I didn't intend this to be interpreted as a "lock". It is NOT. There is risk if the stock goes up.
Thank you also for taking the time to post a response.
No question about it. What I displayed is a bearish (or neutral) spread. For sure, I didn't mean to indicate a bullish trade. Sorry about that.
Thanks for the heads up and the correction.
DMO, I didn't intend this to be interpreted as a "lock". It is NOT. There is risk if the stock goes up.
Thank you also for taking the time to post a response.
Great! I'm glad we're able to restart this discussion. OK, now, how do you trade this position? It's best if we start with a hypothetical. stock at 58. june 60 call at 2. june 55 put at 1 (I'm just making up some numbers). if the stock goes down, my position is a synthetic bearish call vertical, so it profits, no problem there. What if a) stock sits at 58? b) stock rises to 61?....I'm all ears....
Quote from lowvoltrader:
Great! I'm glad we're able to restart this discussion. OK, now, how do you trade this position? It's best if we start with a hypothetical. stock at 58. june 60 call at 2. june 55 put at 1 (I'm just making up some numbers). if the stock goes down, my position is a synthetic bearish call vertical, so it profits, no problem there. What if a) stock sits at 58? b) stock rises to 61?....I'm all ears....
Look at it this way: you're long the synthetic 55-60 put spread, for which you paid 3 bucks.
Had you sold the stock at 60, you would have paid a buck for the spread. But you sold it at 58, increasing your cost by $2.00
From that point on, the rules are the same as for any 5-pt put spread. If at expiration the stock is below the lower leg (55), you make 5 bucks minus the $3.00 you paid for the spread = $2.00. If at expiration the stock is above 60, you lose the $3.00 you paid for the spread.
Your breakeven price is 57. For every dollar below that at expiration, you make an additional dollar, down to 55. At 55 you've made 2 dollars, same at 50, 45, etc. At 60 you've lost the $3.00 you paid for the spread - same at 65, 70, and so forth.
At 58 you've lost $1.00, and at 59, you've lost $2.00.
Or if you prefer, you can think of it as having sold the synthetic 55-60 call spread for $2.00. If at settlement the stock is 55 or lower, you pocket the $2.00. If the stock is 60 or above, you lose $5.00 minus the $2.00 you received for the sale of the spread.
Either way it works out the same.
DMO gave an excellent and accurate description of the synthetic aspects of this. Only thing I would add is that I find that I can more easily roll and adjust using this "reverse collar" configuration. I'm comfortable with this becauses I have a lot of flexibility and can even do some goofy and even risky things from time to time. For example, if I am very bearish on a particular stock, I can reduce the number of protective Calls, thus creating a partial synthetic uncovered Call. I can do this with short stock and short Puts. I'm not cleared for uncovered option writing, but with short stock and short puts, the broker looks at this as a covered put write.
Once one understands the six basic synthetics (and this is not rocket science) numerous alternatives are available. For example, if you want to have some fun, figure out how a covered put write can be converted into a synthetic butterfly, or broken wing butterfly.
But there are drawbacks, all of which are associated with shorting the stock. Two of the more prevalent drawbacks are: (1) the dividend thing previously discussed, and (2) the availability of stock for shorting.
Have fun and don't take yourself too serious.
Once one understands the six basic synthetics (and this is not rocket science) numerous alternatives are available. For example, if you want to have some fun, figure out how a covered put write can be converted into a synthetic butterfly, or broken wing butterfly.
But there are drawbacks, all of which are associated with shorting the stock. Two of the more prevalent drawbacks are: (1) the dividend thing previously discussed, and (2) the availability of stock for shorting.
Have fun and don't take yourself too serious.
Quote from exQQQQseme:
But there are drawbacks, all of which are associated with shorting the stock. Two of the more prevalent drawbacks are: (1) the dividend thing previously discussed, and (2) the availability of stock for shorting.
I confess that I'm completely and totally baffled by this whole stock-shorting thing.
I've now had the experience of having one firm telling me it could not borrow a stock inside or outside the firm no way no how - after which I shorted it 20 minutes later no-questions-asked in an account with a different firm. The stock was not even on the hard-to-borrow list at the second firm.
This whole thing is really mysterious. If anyone knows of a source of information that de-mystifies it in a detailed way, I would appreciate hearing about it. I feel uncomfortable putting money at risk in an area where it is completely unclear to me why one large firm is totally unable to borrow even 100 shares of a stock, while another has available all you could want.
DMO, another interesting posting from you. I know you are accurately stating your experience. I wish I had a good answer for you. I will tell you that I short stocks using online trading through Schwab. They are always responsive when I have a question or a problem.
One thing that used to happen is that if I had short stock and had a Put assigned, instead of closing my short position, they would buy the stock and leave me in a boxed position of both long and short the same amount of stock. The effect was an erroneous margin interest charge. One phone call and the interest charge was immediately reversed. They had the problem corrected in their system within a few days and I haven't had the problem now for almost a year.
One additional comment on this subject: If I am attempting to open a stock short position and I see that red notice telling me that the stock is on the hard to borrow list, I immediately stop and go on to another stock.
Good luck with this. Again, I wish I could be more helpful.
One thing that used to happen is that if I had short stock and had a Put assigned, instead of closing my short position, they would buy the stock and leave me in a boxed position of both long and short the same amount of stock. The effect was an erroneous margin interest charge. One phone call and the interest charge was immediately reversed. They had the problem corrected in their system within a few days and I haven't had the problem now for almost a year.
One additional comment on this subject: If I am attempting to open a stock short position and I see that red notice telling me that the stock is on the hard to borrow list, I immediately stop and go on to another stock.
Good luck with this. Again, I wish I could be more helpful.