"Synthetic" Verticals

E

erol

I'm sure this is in some book somewhere or on the internet but...

I was playing around in TOS,

and thought about the collar discussion.

Then I got thinking...

What if I bought synthetic stock

-Short ATM Put
-Long ATM Call

Then I protected it?

-Short OTM Call
-Long OTM Put

How is this different than simply buying a Call vertical? I know commissions will be higher, but not enough to negate the premium.

When I did the synthetic on MOS-N (SEP Options), unless I'm mistaken, I get a credit for this transaction.

Your greeks are the same as the vertical, and your risk is technically the same, except with the synthetic, your cash is in your account covering the position, whereas in the vertical, its sitting in the market. Receiving the premium for the synthetic makes it cheaper... unless I'm missing something.

I suppose this could be done with bearish view too.

Anything wrong with this approach?
 
Quote from erol:


-Short ATM Put
-Long ATM Call

Then I protected it?

-Short OTM Call
-Long OTM Put

How is this different than simply buying a Call vertical? I know commissions will be higher, but not enough to negate the premium.

Your greeks are the same as the vertical, and your risk is technically the same, except with the synthetic, your cash is in your account covering the position, whereas in the vertical, its sitting in the market. Receiving the premium for the synthetic makes it cheaper... unless I'm missing something.

I suppose this could be done with bearish view too.

Anything wrong with this approach?
More...


Synthetics allow you to look at positions in various ways. But the truth will appear.

You begin by being synthetically long stock and then sell the call and buy the put. Thus, you are long a collar.

And that is equivalent to being short the put spread or long the call spread. That's why it looks like a call vertical. It <i>is</i> a call vertical. With a bunch of extra commissions. Four legs instead of two. Don't do it.

And cash in your account or 'in the market' is not important. If you get the correct prices when trading the options, that tiny interest is factored into the prices.

Mark
 
It's useful to understand synthetics in order to find the least common denominator and get somewhere with the fewest number of legs (not what you're suggesting) or perhaps to facilitate "mutation" of a position in order to shift bias but there's no pricing edge in them.
 
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