Simulating long by buying call and selling put?

tommcginnis said:
(This brings out the nerd in me....)

A strategy carries the implication of (high level) broad views given to general officers.

A tactic (with roots in touch) refers to immediate actions.

'Selling a put and buying a call' tells you nothing about how to manage the trade after that -- no conditions on entry, no time horizon, no position management -- it is a single action. It is a tactic.

Assemble your tactics on entry, alternatives, calendar awareness, and exit, and you'll have a strategy.

(Now, where's that "Nerd!!!" emoji??)
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Thus my initial, concise comment
 
spurityw said:
Hi, I am new to option trading. I learned that by buying a call and selling a put at same strike price will simulate a long position. Does that strategy work? Is there any implicit risks of this strategy?
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The risk profile is the same as when you are buying the shares. The additional risk is no different than any options trade. Because setting up a short put/long call can be done for small debit, zero or even credit and despite the margin requirement, its easy to over-dimension such a trade. Always remember that you are buying 100 shares in such a synthetic stock position per option. So if you buy 10 calls/short 10 puts of amazon you are effectively on the hook to buy 1000 shares of Amazon i.e. you have exposure on 1,000,000$ (more or less). A 20% drop in Amazon therefore translates as a loss of 200,000$ be sure your account can take that before you trade that way.

As someone posted above you must only do this for shares you want to own and I wouldnt really recommend it for shares that pay out hefty dividends because you might be unexpectedly assigned. I currently have one such position open for Monsanto. I happen to believe the take-over by Bayer will happen but - as the merging parties themselves stated - regulatory approval is not due before end Q3/Q4 2017 maybe slightly later. In the mean time - and particularly early on - the share price of Monsanto wasnt going anywhere near the 128$ bid by Bayer.

So with that in view my trade was opened as follows:

2016/10/25
OB 5 C MON JAN18 100 @ 11.15$
OS 5 P MON JAN18 100 @ 10.10$

Net cost $ 525 + Commission - the margin requirement was about 8000$, for a position worth about 50K Monsanto which is the maximum I would feel comfortable owning

By 2017/2/28 Monsanto had risen to about 115$ so there was a lot of money in the position. I decided to move up.

CS 5 C MON JAN18 100 @ 17.00$
CB 5 P MON JAN18 100 @ 4.40$
OB 5 C MON JAN18 115 @ 7.10$
OS 5 P MON JAN18 115@ 6.40$

Net credit ca, $5,500 minus commissions. The margin requirement was no a little larger at 9000$ and the position represented $57,500 of Monsanto stock.

By July 2017 things had changed again - however by this time (this was already a little the case in February) it was becoming harder to sell the put side as the market just wasnt there and the spread was murder. I also felt the short position was not giving me enough in relation to the margin requirement and risk. So I changed again:

CB 5 P MON JAN 18 115@ 4.35$
OS 5 P MON JAN 18 120@ 6.25$

So that added another 500 bucks to the credit. This was a more aggressive move as MON traded at 115 at that moment so I was barely getting what the value was in the money. Right now its even harder to sell puts even ITM because the market is following the expectation the deal will take place. The position is now as follows:

5 C MON JAN18 115 @ 8.20$
-5 P MON JAN18 120 @ 1.60$

Now its not quite a pure synthetic stock position but the effect is more or less the same to having exposure to 500 MON shares. The position in total is now up $9000 more or less on a cash outlay a year ago of 500$ and about 9K in Margin being held throughout by the broker. Pretty much up 100% on a year ago - if I had purchased 500 shares of Monsanto I would be up $12000 (including dividends) that would - however - have required a 50K investment and therefore the return would be 25% not 100%.

As you can see this can work out rather well and you can exit some cash at different points if the position is in the money. Its also true that in the event of a huge drawdown there is some buffering from the long call position as the change in delta would reduce (a little) the damage on the call side compared to a long stock position. The downsides are you get no dividends and you have to be careful about the liquidity - a reason to move the position up or down is to stay near the money where the options are likely to be more liquid. And never forget that your exposure is a 100 multiple of the options. I would never have taken the above position if I had not been confident that even in the event of the merger falling through, Monsanto wouldnt crash far below 90$.
 
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Here's a great example of when you are better off buying a synthetic (long call short put same strike) then buying a stock if you want to hold it.

Mara currently 5.60. The Jan 5 calls are offered at .75 the jan 5 puts are 1.40 bid.

If you are planning on holding the position until jan expiration, you are synthetically buying the stock at 4.95 by buying the synthetic. (this is because it is so hard to borrow.) instead of paying 5.60
 
With american style options. Calls and puts itm with delta 1.00
The dividend increase put premium.
But what happen with call premium ?
Well, if a call is priced under the intrinsic value of the spot it would be easy to buy the call and exercise it the same day.
So the calls can not be priced by the forward of the underlying. Well, maybe the last day before ex dividend could be possible, but I think it doesn't happen.

_The question. what is the priceof itm calls before ex dividend, what is their fair value? they have extrinsic value?

If the call, delta 1 , tomorrow is going to decrease by the amount of dividend, it is supposed to be trading with discount. If it isn't , we could sell the call and buy it the next day cheaper. Yes of course can be early assignement

One consideration. On the day previous to ex dividend, If the itm call trades only with the intrinsic value but without extrinsic value, maybe is an undervaluated call, specially if it is a call with remaining dte. and with an uptrend underlying. So maybe the good idea is to buy the call and When the underlying recover the dividend we could sell the call with intrinsic plus extrinsic.

So on the one hand seems better idea to sell the call but on the other to sell it. Please expiremented trades, which is the correct way.
This week is going to be ex dividend date for Spy. will be interesting for me to see how price behaves.

thanks.
 
raf_bcn said:
With american style options. Calls and puts itm with delta 1.00
The dividend increase put premium.
But what happen with call premium ?
Well, if a call is priced under the intrinsic value of the spot it would be easy to buy the call and exercise it the same day.
So the calls can not be priced by the forward of the underlying. Well, maybe the last day before ex dividend could be possible, but I think it doesn't happen.

_The question. what is the priceof itm calls before ex dividend, what is their fair value? they have extrinsic value?

If the call, delta 1 , tomorrow is going to decrease by the amount of dividend, it is supposed to be trading with discount. If it isn't , we could sell the call and buy it the next day cheaper. Yes of course can be early assignement

One consideration. On the day previous to ex dividend, If the itm call trades only with the intrinsic value but without extrinsic value, maybe is an undervaluated call, specially if it is a call with remaining dte. and with an uptrend underlying. So maybe the good idea is to buy the call and When the underlying recover the dividend we could sell the call with intrinsic plus extrinsic.

So on the one hand seems better idea to sell the call but on the other to sell it. Please expiremented trades, which is the correct way.
This week is going to be ex dividend date for Spy. will be interesting for me to see how price behaves.

thanks.
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if you think that you are smarter than the people on the floor of the exchange, think again.
 
zdreg said:
if you think that you are smarter than the people on the floor of the exchange, think again
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Those floor traders are not That smart...most of them are simply order processors. They are not paid to think.
Most of them walk and talk like neanderthals.

And besides, this is not to imply you need to be smart to succeed in trading. In fact, I think too much brains is a hindrance...because you'll need too much proof and justification and evidence before placing every trade.

Trading is a fine line between having proof and facts and justification -- and just simply shooting from the hip, relying on your gut or intuition and skill. Making that snap judgement call in the heat of that dynamic trading moment.
 
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i assumed you understood the term to imply marker makers. market makers hedge their trades and make their money off public retail traders who trade off their gut. market makers are the house just like in a casino. we know who are the final winners.
 
zdreg said:
if you think that you are smarter than the people on the floor of the exchange, think again.
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Well, your response might seem a little aggressive and out of place, but actually it makes sense.
You are saying that they have thouhgt of everything and there is no possibility of scoring an easy goal. The market is efficient.

I don't know. Maybe other answer might be more enlightening and help to understand how the smart people on the floor thinks.
Can you help?

thanks
 
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