Synthetic underlying and writing options

D

doubleu

Hi all. Am relatively new to trading options but not to trading and have a question regarding synthetic underlying with options.

Rather than writing naked options for premium one can hedge with the underlying, is it possible to implement a synthetic underlying in one calendar month and then operate a option writing strategy in another month and receive the benefits of being delta "neutral" or at least as close as possible?

Thanks,
 
Remember 1 call and 1 short put is the equivalent of 100 shares of stock. That can make it difficult.to Delta hedge when the increments are 100...
 
It sounds like you may be over complicating things by creating a synthetic. Are you looking to hedge a short-dated short-term options writing strategy. Using the term calendar implies or sounds like you might want to sell front month and hedge with back month? That is a simple calendar - you can achieve neutrality. The real challenge becomes european style calendars where you will be margined as a naked because the back month cannot be exercised.
 
It is a bit unclear what your current situation is and what you are trying to achieve ("Rather than writing naked options for premium...") so I don't know what your objective is and it's hard to get a handle on something that might help you out.
You can certainly create a synthetic by buying a call and selling a put but, like ajacobson said, it depends on your underlying (if it's european style) and if your underlying pays out a dividend it will also affect the price of your synthetic (dividends increase the price of your put and reduce that of your call). Also, if you want to keep that long position once it expires you will need to roll it out to the next expiration (which you wouldn't do with straight up long underlying)
With options you can create and re-create pretty much any strategy you want but your challenge as a trader is to increase complexity when it really helps you in some way (liquidity, etc.) and not just add complexity for complexity's sake.
If what you are trying to do is a covered call where the long underlying piece is created with a combo it is much much simpler to just sell a naked put (or if it's an IRA sell a put and buy a very low delta wing to cap your risk).
 
spindr0 said:
It's not clear what you are trying to accomplish.
More...

He says he is new to trading, and this strategy is a little too hard for a new trader, but he says he wants to do a buy write delta neutral, vs one up, but instead of buying the stock, synthetically buy the stock. This can be less margin and reduce cash out lay. An example, if I read it right, would be:
+10 AAPL JAN 19 2018 Call 6.30
-10 AAPL JAN 19 2018 Put 6.60
- 56 AAPL DEC 15 2017 185 Call 1.07 (.18D)

I'm not recommending this, just giving an example of what fits his question. This will require a lot of margin in a reg-T account.
 
Robert Morse said:
An example, if I read it right, would be:
+10 AAPL JAN 19 2018 Call 6.30
-10 AAPL JAN 19 2018 Put 6.60
- 56 AAPL DEC 15 2017 185 Call 1.07 (.18D)
More...

ajacobsen: "It sounds like you ...

TradingDemystified: " It is a bit unclear what your current situation is and what you are trying to achieve"

lylec: "Please explain your definition of a synthetic and underlying?"

Me: "It's not clear what you are trying to accomplish."

You: "If I read it right"


Do you sense a pattern here?
 
Hello all, yes thank you all for attempting to sift through the garbled mess I wrote. Apologies for that.

@Robert Morse, what you wrote was what I was trying to get at; reducing cash outlay and then use the synthetic instead of buying stock. This isn't something that I am trying to do or necessarily want to do, I just wanted to gauge the flexibility of the instrument and seeing as I don't know any one who trades options I thought I'd ask!
 
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