Synthetic straddles on pit traded futures contracts?
- Thread starter steve3052
- Start date
B does the same as A. If A buys 1K stock, so does B. They end up with the same thing.
It's an illusion that a put and a call are different in any meaningful way. They're not. They're only different in the most superficial way - their deltas - and it is a trivial matter to adjust that with the underlying
So whether you are long 40 puts, 40 calls, 20 straddles, 27 calls and 13 puts - it doesn't make a bit of difference if the delta is the same. I'm assuming of course that all options are at the same strike.
Well , when one party ( me in this case) want to challenge a statement (equivalency) , he controls scenarios/what ifs ( in this case : price action). In my wild imagination, stock tanked first and than recovered. Noticed that we are talking about LEAPS .
Would of you choose just buying 1k (no exercise), I would of make the price sit there , hence, loss of cost of carry vis a vis A
Wow IV, that's some volatile stock you've got! I'd say hang on and scalp your gammas for all they're worth!
Here's an answer to your points, one at a time:
1. Right. At the outset I said that you have the same thing for all practical purposes, but that margining etc. may differ. Your scenario falls into the category of "etc."
2. In B you exercise and in A you don't, so of course you end up with a different number of options! It's apples and oranges.
Your example is why I'm not a big fan of early exercise in most cases - you're giving away something you paid for, namely, potential gammas. You're letting the seller off the hook for free. It's like buying car insurance for a year, cancelling after six months and telling Allstate "that's okay, don't bother to refund me the unused portion."
I just overviewed this thread, and could see a lot of discussions about natural straddles and its two synthetics. Let us look at it from the short side with stock as underlying (no dividend to simplify things) assuming positive carry with american exercise. The three positions are:
A. -1p, and -1c
B. -2P-1S
C. -2C+1S.
Stock goes sufficiently down after option trading stops but before deadline to exercise (puts) is due. Your can assume a stock price move as large as you can to see the special cases where the difference may exist between the three positions.
The three positions are different from an exercise and carry point of views. For instance if a move down happens, I can cover position C with no problem by selling stock. If A, I still do not know if I should cover or not as the exercise of 1 put is not certain. If B, the problem is more pronounced as we have two short puts to deal with.
So Atticus seems to have had a good instinct when he mentioned sensitivity to price, but he seemed to have been put to deal with another issue.
When the price heads south the sum of the delta of the call and the absolute value of the put delta is no longer necessarily equal to 1, but a little bit more than 1. In addition a call will lose the vol premimum, but the put will compensate the vol premium by an exercise premium depending on the distance of the strike to the new stock price.
My question would be: how would you handle the three positions when you do not know whether you will be assigned or not on the short put and you want to deal with direction risk when stock tanks in A.H. (I assume that the use of AH earlier in this thread meant After Hours).
A. -1p, and -1c
B. -2P-1S
C. -2C+1S.
Stock goes sufficiently down after option trading stops but before deadline to exercise (puts) is due. Your can assume a stock price move as large as you can to see the special cases where the difference may exist between the three positions.
The three positions are different from an exercise and carry point of views. For instance if a move down happens, I can cover position C with no problem by selling stock. If A, I still do not know if I should cover or not as the exercise of 1 put is not certain. If B, the problem is more pronounced as we have two short puts to deal with.
So Atticus seems to have had a good instinct when he mentioned sensitivity to price, but he seemed to have been put to deal with another issue.
When the price heads south the sum of the delta of the call and the absolute value of the put delta is no longer necessarily equal to 1, but a little bit more than 1. In addition a call will lose the vol premimum, but the put will compensate the vol premium by an exercise premium depending on the distance of the strike to the new stock price.
My question would be: how would you handle the three positions when you do not know whether you will be assigned or not on the short put and you want to deal with direction risk when stock tanks in A.H. (I assume that the use of AH earlier in this thread meant After Hours).
It is the middle of the night, and I may have mis-understood something but I think the above should rather be:
1. A will be OUT of the trade ; B must hold till exp. A is AHEAD by 50% of (cost of carry).
While Statement 2. is correct, I would also add that it should be straightforward to understand if a reader also understands that the act of exercising a put is equivalent to selling a call at same strike. There is no destruction of calls in A as there is no exercise, and the buying of stock in A simply transformed a put to a call, which is the reason behind ending up with 2 calls rather than 1 call.