Will buy 1 call and sell 1 put completely eliminate volatility?

How is this not exposed to IV?

Long call = long implied volatility
Short put = short implied volatility

But they don’t cancel out - you could be whacked from several directions if the market collapses and volatility rises:

Loss in premium value on the short put

plus loss in premium value on the long call

plus loss in volatility value in the short put volatility (an expected rise in volatility on the long call will hardly compensate).

In no way is this volatility neutral or market neutral; it is very bullish. This is a high risk (bad) position. Just buy the call.

Grant.
 
Quote from Grant:

How is this not exposed to IV?

Long call = long implied volatility
Short put = short implied volatility

But they don’t cancel out - you could be whacked from several directions if the market collapses and volatility rises:

Loss in premium value on the short put

plus loss in premium value on the long call

plus loss in volatility value in the short put volatility (an expected rise in volatility on the long call will hardly compensate).

In no way is this volatility neutral or market neutral; it is very bullish. This is a high risk (bad) position. Just buy the call.

Grant.
More...

if volatility rises, your long call rises in propotion too. Isnt? How can the IV not cancel out?
It is a bullish directional position. But doesnt exposed to IV.











And one more question everyone: Does the decay in time value cancel out too?
 
Vega, Gamma and Theta cancel out. That's why it is called a synthetic long. It has exactly the same greeks as the actual long - i.e. delta=1, gamma, vega and theta=0.
 
Unless, of course, there's an unexpected dividend, stock-for-stock aquisition, or something else odd that happens. In that case, your synthetic long may be muuch more risky than a real long.

In any situation where put-call parity is broken, you're in trouble. Fortunately, those situations are relatively rare.
 
Quote from Grant:

In no way is this volatility neutral or market neutral; it is very bullish. This is a high risk (bad) position. Just buy the call.
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Yes, it is as bullish and risky as long stock. Does that make it bad? LOL. Nobody suggested it was market neutral.

Synthetics. Put/call parity. This is absolutely fundamental options 101 stuff.

For most intents and purposes (some exceptions outlined by FullyArticulate), a synthetic equivalent has the same risk i.e. greeks as the natural at all points in time and space. You can swap one for the other whenever you want. That means it is volatility neutral. It can't really be debated!

MoMoney.
 
Thanks a lot guys!

One last question i have is: Say if the spot price is trading at 11, and i am bullish. The only strike price available is 10 or 12. Then i go long 10 call, and sell 10 put. The delta is different for the call and the put because we are not at the money. In this case, am i exposed to the movement in time decay and implied vol.?
 
Quote from e-miNY:

Thanks a lot guys!

One last question i have is: Say if the spot price is trading at 11, and i am bullish. The only strike price available is 10 or 12. Then i go long 10 call, and sell 10 put. The delta is different for the call and the put because we are not at the money. In this case, am i exposed to the movement in time decay and implied vol.?
More...

Once again, no. Let's put it this way, even if you trade the options with 5 strike it is still the same thing.
 
moneythansense

“That means it is volatility neutral. It can't really be debated!” So he won’t be whacked if the market dives and vol jumps?

You’re right, my mistake – no-one suggested it was market neutral.

“Does that make it bad”? There are better bullish positions than a short put with less risk.

Of course, I stand to be corrected.

Grant.
 
Quote from Grant:

moneythansense

“That means it is volatility neutral. It can't really be debated!” So he won’t be whacked if the market dives and vol jumps?
More...
No.

A 50% increase in vol will affect both the put and the call. The vega is neutral.

If this were not true, think about the conversions you could put on for a credit.
 
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