Synthetic Long cheaper than a stock?

[failed_trad3r]

I am interested in buying this stock at $9.

I could also sell a June $10 strike put for $3, and buy a $2 call at strike $10.

Am I right or is the synthetic long, selling the put and buying the call more advantageous than outright buying the stock?

 

[rew]

Don't forget to include your margin requirement on the short put of about 2 bucks. But yes, it is cheaper than the stock. A synthetic long is essentially the same as a long single stock futures position. Of course you have to fight the nasty bid/ask spreads that options have on both the buy and sell. And remember that leverage works both ways.

 

[spindr0]

Ignoring commissions, your purchase price is the same either way.

The advantage of the synthetic is that the margin is $380 versus $450 for the stock. The disadvantage is B/A slippage and add'l commissions.

 

[nazzdack]

Quote from failed_trad3r:
----buying this stock....
----synthetic long....
----more advantageous than buying the stock?

1) There can be expiration/exercise risk with the options.
2) Option holders do not receive dividends.
3) Option holders have no voting rights.
4) At cocktail parties, people will look at you in awe OR their eyes will glaze over when you tell them you are a "synthetic" shareholder instead of a traditional shareholder.

 

[spindr0]

Quote from nazzdack:

[3) Option holders have no voting rights.

You neglected to mention 3b) the option holder doesn't get that recyclable glossy annual report

 

[nazzdack]

Quote from spindr0:
---- 3b) the option holder doesn't get that recyclable glossy annual report

Option holders are more "beneficial" to the environment.

 

[drcha]

Quote from spindr0:

You neglected to mention 3b) the option holder doesn't get that recyclable glossy annual report

Yes, this is an issue. Should we vote here on the coolest annual report?

I have 3 shares of SJM in an old account--left over from a merger or spinoff many years ago. I don't think much of the stock, but SJM produces the most artistic and delicious annual report in the world. Jam, peanut butter, pancakes, waffles, cakes, frostings, muffins, ice cream toppings, syrups, etc, all in living color. It is worth keeping the stock just to look at it.

 

[rew]

Quote from nazzdack:

1) There can be expiration/exercise risk with the options.
2) Option holders do not receive dividends.
3) Option holders have no voting rights.
4) At cocktail parties, people will look at you in awe OR their eyes will glaze over when you tell them you are a "synthetic" shareholder instead of a traditional shareholder.

Known dividend payments are priced into the call and put prices (calls are cheaper and puts are more expensive by a net amount equal to the present value of the dividends paid out). On the ex-dividend date the difference between the call and put prices should increase by the value of the dividend, thus increasing the value of the synthetic short by the value of the dividend, assuming the underlying price stays the same. Of course the underlying price usually drops by the value of the dividend on the ex-dividend date, so the synthetic short keeps about the same value as these two factors cancel out - just as a stock holder gets paid his dividend but sees his stock drop in value by the same amount. The bottom line is that the holder of a synthetic long can expect to see his position gain by any increase in the value of the underlying plus any dividends paid, just as a holder of the stock can.

 

[hippie]

Quote from rew:

Known dividend payments are priced into the call and put prices (calls are cheaper and puts are more expensive by a net amount equal to the present value of the dividends paid out). On the ex-dividend date the difference between the call and put prices should increase by the value of the dividend, thus increasing the value of the synthetic short by the value of the dividend, assuming the underlying price stays the same. Of course the underlying price usually drops by the value of the dividend on the ex-dividend date, so the synthetic short keeps about the same value as these two factors cancel out - just as a stock holder gets paid his dividend but sees his stock drop in value by the same amount. The bottom line is that the holder of a synthetic long can expect to see his position gain by any increase in the value of the underlying plus any dividends paid, just as a holder of the stock can.

If you do not have margin, do options. There is no 3 day wait for clearing in options as it is in the stock.

Also, in a synthetic long, I can liquidate one leg of the option at a time. More flexibility.

 

[rew]

Quote from rew:

Known dividend payments are priced into the call and put prices (calls are cheaper and puts are more expensive by a net amount equal to the present value of the dividends paid out). On the ex-dividend date the difference between the call and put prices should increase by the value of the dividend, thus increasing the value of the <i>synthetic short</i> by the value of the dividend, assuming the underlying price stays the same. Of course the underlying price usually drops by the value of the dividend on the ex-dividend date, so the <i>synthetic short</i> keeps about the same value as these two factors cancel out - just as a stock holder gets paid his dividend but sees his stock drop in value by the same amount. The bottom line is that the holder of a synthetic long can expect to see his position gain by any increase in the value of the underlying plus any dividends paid, just as a holder of the stock can.

Um, where I said "synthetic short" I meant "synthetic long". (Passed the 30 minute edit limit.)