Synthetic straddles on pit traded futures contracts?

newguy05 · Apr 21, 2008

Quote from atticus:

I always chose the synthetic [long spot x short calls] when trading index straddles. It gives you an "out" in the overnight session.

Hi, can someone clarify this for me. Isnt a long synthetic straddle long underlying and long 2x atm put? If it's long underlying and short calls and the underlying gaps down due to a black swan, how are you covered on the downside? as your max protection is limited to the premium received for the short calls.

are we saying, sell x number of DITM calls where the premium received = 1x underlying value?

thanks

dipper17 · Apr 21, 2008

The synthetic straddle he used in that example is short straddle equivalence, youâre referring to long straddle.

commiebat · Apr 21, 2008

Quote from atticus:

You and xflat are right. You don't change vol sign or magnitude by removing spot from the synthetic. It only impacts upside gammas/deltas.

How does trading spot impact gamma?

atticus · Apr 21, 2008

Quote from commiebat:

How does trading spot impact gamma?

It doesn't. The 2* upside naked calls are no longer straddle-equivalent.

You don't change vol sign or magnitude by removing spot from the synthetic. It only impacts upside gammas/deltas.

Gamma and dgamma are sensitive to Px. There is no spot delta-hedge remaining.

commiebat · Apr 21, 2008

Quote from atticus:

It doesn't.

Of course it doesn't. You said it did, which is why I asked.

ETA: And while I was typing this, you edited your last post to reiterate that trading spot affects the gamma of the position. Even though you also said it doesn't.

Make up your mind, atti.

atticus · Apr 21, 2008

Quote from commiebat:

Of course it doesn't. You said it did, which is why I asked.

Trading spot does not affect gamma, only trading in the options. My initial comment which you cite referred to the resulting naked calls after removal of spot.

"You don't change vol sign or magnitude by removing spot from the synthetic. It only impacts upside gammas/deltas.

The short naked call gamma is sensitive so Px.

I didn't edit my last before your last.

dipper17 · Apr 21, 2008

someones wrong

commiebat · Apr 21, 2008

Quote from atticus:

[...] removing spot from the synthetic [...] only impacts upside gammas/deltas.

Am I missing something here?

atticus · Apr 21, 2008

Quote from commiebat:

Am I missing something here?

Yeah, apparently you're suggesting that short naked calls have static gammas. Or that they somehow are price insensitive and equivalent to the straddle gamma.

The call gammas are no longer equivalent [to the straddle].

You've taken a position equivalent to the natural straddle and converted it to two short calls. The gamma-sensitivity is no longer equivalent. it is no longer a straddle.

commiebat · Apr 21, 2008

Quote from atticus:

Yeah, apparently you're suggesting that short naked calls have static gammas.

Pretty sure I'm not. Here, I'll spell it out for you again, this time in crayon.

The call gammas are no longer equivalent [to the straddle].

Okay, here's what we'll do. You give me an example of a straddle (natural or synthetic with spot and 2x calls, your choice). Then tell me how the gamma changes when you trade spot against it, and how you would trade the spot to make the total gamma different from the gamma of the straddle.

You know, like you did earlier with vega

Edited in by atticus after I quoted him

You've taken a position equivalent to the natural straddle and converted it to two short calls. The gamma-sensitivity is no longer equivalent. it is no longer a straddle.

Of course it's no longer a straddle. But it still has the same gamma. How is this not obvious to you?