Synthetic Stocks

[addias342]

Are synthetic stocks a good idea for day trading or swing trading?

 

[addias342]

anyone?

 

[EquityGuy4321]

Perhaps you should specify what you mean by synthetic stock. Do you mean CFDs? Do you mean synthetic long/short using options?

 

[addias342]

I was think about using options to created synthetic stock. I understand that it is high risk, but is a good strategy for day trading or swing trading options.

Buy 1 Atm Call
Sell 1 Atm Put

or

Buy 1 Otm Call
Sell 1 Otm Put

 

[Tino Soros]

Thinkorswim has a nice back-testing tool where you can see how this strategy works.

 

[tomk96]

you will need to give up the bid/ask twice as many times and it will be a wider spread.

 

[spindr0]

Quote from addias342:

Are synthetic stocks a good idea for day trading or swing trading?

Synthetic stock has the same P&L as the natural. It requires less margin but has more slippage and commissions. What's best for day or swing trading is getting the direction right.

 

[addias342]

Thanks for your replies, I used TOS On Demand to back test the strategy. I plan to use this strategy on index ETF such as the SPY and QQQQ, so the spread should not be to bad. Does anyone have actually experience using synthetic stock?

 

[weewilly]

These are risk-reversals and they are a very important tool in your toolbox. The negative skew in stocks/indexes is such that you can use this tool to capture yield in the event nothing happens. Splitting the strikes (selling otm puts/buying otm calls) can give you even more skew benefit. Of course you have to gauge your risk carefully, as always.

As an example, suppose you became bullish on AAPL, you might buy 100 sh of stock. Fine. Or, you might sell a 330P and buy a 330C for a credit, or sell a 320P and buy a 340C, also for a credit and a 10pt cushion to the downside. This is a bread-and-butter trade for options traders.

 

[Soon2Bgreat]

Quote from weewilly:

These are risk-reversals and they are a very important tool in your toolbox. The negative skew in stocks/indexes is such that you can use this tool to capture yield in the event nothing happens. Splitting the strikes (selling otm puts/buying otm calls) can give you even more skew benefit. Of course you have to gauge your risk carefully, as always.

As an example, suppose you became bullish on AAPL, you might buy 100 sh of stock. Fine. Or, you might sell a 330P and buy a 330C for a credit, or sell a 320P and buy a 340C, also for a credit and a 10pt cushion to the downside. This is a bread-and-butter trade for options traders.

I'm not 100% up on lingo, but I think risk-reversals generally imply different strikes. Synthetic stock is by definition the same strike (330 P/C). While you can go long/short synthetic stock for a credit in most cases this will be equivalent to going long/short the underlying shares because what you're seeing are interest rate/dividend effects (put/call parity).

This can easily be verified, simply buy 100 shares of SPY and short synthetic stock - if you can profit great, but more than likely it'll just cost you commissions.