Synthetics

N

Neoxx

I buy mostly ITM calls, and I pay through the teeth for the spread, especially if it's a profitable trade.

I've started learning about synthetics, and I wonder if I can use them to cut my unnecessary expenses.

If I enter a long position with an 80 delta call and the stock makes a nice move, my delta should be pretty close to 100.

When it seems the run is over, I can liquidate and pay the spread.

However, if instead I short the stock, I'll have locked in my profits and have a synthetic put.

If the stock is reversing, I can simply hold and profit on the new position, or sell a put and pay an OTM b/a spread, rather than an ITM one. Potentially save ~$0.20/contract?

However, as with everything else, if it's too good to be true....

So would anyone care to dispel my illusion?
 
Actually, that's pretty much it. It's not too good to be true, all you're doing is locking in profit, you'll give up some of the profit on the call, but, essentially, your position will be a long put at a negative cost. So you're guaranteed a profit with potential additional profit to the downside.

If you want to completely square off your position then you would just sell the same strike put, hence, creating a reversal, which, excluding pin risk, is risk-free.

You have to compare the costs of doing a reversal (including commissions at expiration) and the cost of just closing out the call and paying the spread or part of it.
 
Pin risk is the risk to a trader who is short an option that, at expiration, the underlying stock price is equal to (or "pinned to") the short option's strike price. If this happens, he will not know whether he will be assigned on his short option. The risk is that the trader doesn't know if he will have no stock position, a short stock position (if he was short a call), or a long stock position (if he was short a put) on the Monday following expiration and thus be subject to an adverse price move in the stock.
 
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