Ooops, my P/L on the verts were not correct. I was looking at the P/L if the price were to move between $60-$70 today, not at expiration. In any case, the ratio is still about the same. The P/L on the 62.50/67.50 would be 2.47/-2.53
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strike selection question
- Thread starter spreadn00b
- Start date
Quote from spreadn00b:
OK, so theoretically this isn't QUITE the same if I understand what you're saying. If you remember in my first post, the 65/70 collar had a P/L of 2.93/-1.80. The 65/70 bull vertical which I interpreted as buying a 65 call and selling a 70 call has a theroetical P/L of 1.07/-1.00. The 62.50/67.75 collar had a 2.16/-2.84, the bull vertical is 1.01/-1.11.
Please correct me if I'm wrong and thanks for adding some things to think about.
I didn't look at the numbers but a collar is a synthetic vertical. That's all I need to know!
I'm not sure if you have position analysis software or not, if you do, I would suggest you compare the collars alongside the verticals and it should become apparent that they have identical risk profiles.
I'm not sure where you're getting your numbers from but I'm assuming you're familiar with verticals since I've seen you hanging out on the SPX credit spread thread.
A $5 vertical has a max profit of $5 minus the debit paid for the vertical.
Both the 65/70 and 62.50/67.50 verticals are $5 verticals.
The synthetic debit paid to own the 62.50/67.50 vertical is $2.84. Therefore the max profit the vertical makes is ($5-$2.84) = $2.16 i.e. the same as the collar.
The PnL numbers you have outlined for the verticals and the first collar don't make sense: max proft + max loss must equal $5. Occam's razor suggests there may be an error in your calculations?
I don't have access to pricing at the moment so I can't see where the problem might be.
MoMoney.
I don't know, I'll consider that I'm doing something wrong at the moment and continue to research.
Quote from momoneythansens:
I didn't look at the numbers but a collar is a synthetic vertical. That's all I need to know!
I'm not sure if you have position analysis software or not, if you do, I would suggest you compare the collars alongside the verticals and it should become apparent that they have identical risk profiles.
I'm not sure where you're getting your numbers from but I'm assuming you're familiar with verticals since I've seen you hanging out on the SPX credit spread thread.
A $5 vertical has a max profit of $5 minus the debit paid for the vertical.
Both the 65/70 and 62.50/67.50 verticals are $5 verticals.
The synthetic debit paid to own the 62.50/67.50 vertical is $2.84. Therefore the max profit the vertical makes is ($5-$2.84) = $2.16 i.e. the same as the collar.
The PnL numbers you have outlined for the verticals and the first collar don't make sense: max proft + max loss must equal $5. Occam's razor suggests there may be an error in your calculations?
I don't have access to pricing at the moment so I can't see where the problem might be.
MoMoney.
Quote from spreadn00b:
Ooops, my P/L on the verts were not correct. I was looking at the P/L if the price were to move between $60-$70 today, not at expiration. In any case, the ratio is still about the same. The P/L on the 62.50/67.50 would be 2.47/-2.53
Looks like we cross posted.
To recap, we have:
62.50/67.50 collar max loss: $2.16, max profit: $2.84
62.50/67.50 vertical max loss: $2.53, max profit: $2.47
I'm suggesting the two positions are identical, so where is the discrepancy coming from?
If we buy the cheap one and sell the expensive one we can have a risk free arbitrage:
Buy Collar (long stock + long PUT 62.50 + short CALL 67.50)
Sell Vertical (short CALL 62.5 + long CALL 67.50)
The two CALLs at 67.50 cancel each other out so we are left with:
long stock + long PUT 62.5 + short CALL 62.5
in other words:
long stock + short synthetic
otherwise known as a conversion. A locked position. "Risk-free".
This should be proof that indeed the two positions (the collar and the vertical) are synthetically equivalent.
The discrepancy in price to own the vertical whether it is the synthetic or the natural vertical ($2.53-$2.16=$0.37) should be accounted for by cost of carry. I just noticed you are using JAN07 options so the difference is more visible than shorter term options. If not, then there really is an opportunity for arbitrage, but it is not likely.
MoMoney.
MoMoney
This may sound idiotic but how do you work out the max risk on the synthetic bull vertical? I can see how you arrive at the max profit by subtracting the strikes from eachother and ignoring the synthetic long stock component. But if you collect a credit on opening of the trade? For verticals it's always been: max risk = debit paid or max risk = strike difference minus credit received. Boy, I'm confused now.
daddy's boy
This may sound idiotic but how do you work out the max risk on the synthetic bull vertical? I can see how you arrive at the max profit by subtracting the strikes from eachother and ignoring the synthetic long stock component. But if you collect a credit on opening of the trade? For verticals it's always been: max risk = debit paid or max risk = strike difference minus credit received. Boy, I'm confused now.
daddy's boy
I think I just worked it out whilst having my shower.
To get max risk I subtract the long put strike from the synthetic long stock strike and add the option premium (if a debit) or subtract the option premium (if a credit)?
daddy's boy
To get max risk I subtract the long put strike from the synthetic long stock strike and add the option premium (if a debit) or subtract the option premium (if a credit)?
daddy's boy
Quote from daddy'sboy:
I think I just worked it out whilst having my shower.
To get max risk I subtract the long put strike from the synthetic long stock strike and add the option premium (if a debit) or subtract the option premium (if a credit)?
daddy's boy
There's a few ways to do it depending on which route you take. Probably the easiest is to work it out the same way as a natural debit vertical i.e. as you said, the max risk is the debit paid to own the vertical:
Cost of long leg - cost of short leg
In the collar, the long leg is the long stock + long PUT i.e. synthetic long CALL:
cost of Put + Stock price - striKe price
Then subtract the premium received from the short leg i.e the short CALL.
I had to read your post 6 times before it sunk in, but now I got it! That's great. So now I really don't have a reason to buy the underlying, synthetic or otherwise.
Many thanks!
Many thanks!
Quote from momoneythansens:
Looks like we cross posted.
To recap, we have:
62.50/67.50 collar max loss: $2.16, max profit: $2.84
62.50/67.50 vertical max loss: $2.53, max profit: $2.47
I'm suggesting the two positions are identical, so where is the discrepancy coming from?
If we buy the cheap one and sell the expensive one we can have a risk free arbitrage:
Buy Collar (long stock + long PUT 62.50 + short CALL 67.50)
Sell Vertical (short CALL 62.5 + long CALL 67.50)
The two CALLs at 67.50 cancel each other out so we are left with:
long stock + long PUT 62.5 + short CALL 62.5
in other words:
long stock + short synthetic
otherwise known as a conversion. A locked position. "Risk-free".
This should be proof that indeed the two positions (the collar and the vertical) are synthetically equivalent.
The discrepancy in price to own the vertical whether it is the synthetic or the natural vertical ($2.53-$2.16=$0.37) should be accounted for by cost of carry. I just noticed you are using JAN07 options so the difference is more visible than shorter term options. If not, then there really is an opportunity for arbitrage, but it is not likely.
MoMoney.
Hrmmm ... I'm trying to place a spread today as a test on XOM. The Bid/Ask on the spreads was 1.00/1.30, I came in at 1.15 to test the waters (1 measly contract). As the price came down, the Ask came down to 1.20 and I still didn't get filled. Damn.
Is this fairly typical? I believe theoretical price was about 1.10, so 1.15 was no big deal, but once I pushed it up to 1.30, this really started to hurt P/L.
Is this fairly typical? I believe theoretical price was about 1.10, so 1.15 was no big deal, but once I pushed it up to 1.30, this really started to hurt P/L.