Writing Covered Puts

Ursa, you're right. I wasn't listening. I was reading. MTA said, "That's not the point. The point is that if I make a trade I wanna minimize my transaction costs so understanding synthetics allows me to do just that. Why fight a wide bid/ask spread on ITM options when I can achieve the same position by going with OTM ones.?

How does "going with OTM" ones equate to selling or buying?

Of course I look at a strategy blackboard. But it's my blackboard, not yours.

Bob
 
Beltway, yes it does. I agree with you.

Consider this:

1. Buy Calls
2. Short shares in an amount equal to the number of deltas created by #1.

In previous postings in other threads I have had more than one dissenter concede that this is a gamma scalp.

Let me come down from my soapbox for a second and ask a sincere question? Isn't any positive Gamma a gamma scalp in some form? Especially when there are no negative gamma legs. My initial reaction would be that it is, but could be overlooking something.

The title of this forum is Covered Put Writes. I really like this strategy; however, it's biggest drawback is that the short puts create negative gamma. I hate negative gamma, but there are times when one makes a decision to live with it.



Bob
 
Quote from exQQQQseme:

Beltway, yes it does. I agree with you.

Consider this:

1. Buy Calls
2. Short shares in an amount equal to the number of deltas created by #1.

In previous postings in other threads I have had more than one dissenter concede that this is a gamma scalp.

Let me come down from my soapbox for a second and ask a sincere question? Isn't any positive Gamma a gamma scalp in some form? Especially when there are no negative gamma legs. My initial reaction would be that it is, but could be overlooking something.

The title of this forum is Covered Put Writes. I really like this strategy; however, it's biggest drawback is that the short puts create negative gamma. I hate negative gamma, but there are times when one makes a decision to live with it.



Bob
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None of this really matters to the main problem here. If we are in agreement that synthetics are real (and I hope we are) then you're "Covered Put Writes" as described above are exactly equivalent to a long straddle. Any adjustment you make after the fact (gamma scalping or otherwise) is exactly the same in relation to the original position regardless of being synthetic or natural.

The only difference (again, regardless of adjustments) is transactions. It will almost always be less profitable using synthetics than natural positions. This makes the position you are describing less optimum than it's natural equivalent (yes, even if you're currently profitable).
 
Michael, which is the synthetic side of the street and which is the natural side? Isn't the synthetic side of the street always the other side of the street?

Bob
 
Quote from exQQQQseme:

Michael, which is the synthetic side of the street and which is the natural side? Isn't the synthetic side of the street always the other side of the street?

Bob
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I'm not sure I understand the question. Then again you might be jesting and I just don't get it. The synthetic is the one with an extra position.
 
Quote from exQQQQseme:

...How does "going with OTM" ones equate to selling or buying?

Of course I look at a strategy blackboard. But it's my blackboard, not yours.

Bob
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Bob,

Buying an ITM put vertical is equivalent to selling an OTM call vertical and vice versa (assuming the same pair of strike prices). It's called a box spread.
 
Sorry Michael. No I was not jesting. Maybe I don't understand the overall concept of synthetics. As I read the various postings, the writer seems to try to convince the reader that alternative A is better than alternative B. Well if there is a material difference, is the synthetic equivalence still applicable?

My comment regarding the "other side of the street" was my way of asking:

If A = B, doesn't it also follow that B = A? Saying it another way, is the synthetic concept the same as an algebra equation?

To summarize, I really don't mind it when someone strongly dissents from my stated opinions. And when I give it back, I still respect where you are coming from. I look at these strategies that I am so fond of as a chess game. In that game it's not the individual moves that matter, it's the ability to think a few moves ahead that will eventually determine the winner. If my method or strategy allows me to better look ahead a few moves, then that's the road I'm going to travel. No doubt everyone of you will decide in similar fashion.

===============
MTE: Thanks for the explanation. I get it now.
===============



Sincerely,
Bob
 
Quote from exQQQQseme:

Sorry Michael. No I was not jesting. Maybe I don't understand the overall concept of synthetics. As I read the various postings, the writer seems to try to convince the reader that alternative A ...
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From a risk and reward perspective you are correct. A = B and B = A. Practically speaking there are commissions and spreads that exist when entering positions. If A = 1 spread and 1 commission and B = 2 spreads and 2 commissions and A = B from a risk / reward profile then it's pretty easy to distinguish which is more preferred to use practically.

This is not really a disagreement about strategies. I agree that there are no wrong or right strategies. The way a strategy is used and managed is just as or more important than the strategy chosen.

Synthetics however, are a reality. Whichever strategy you are using, and whatever method you are using to manage it will have the exact same impact on a position and it's synthetic equivalent. The only difference is commissions and spreads which will be more expensive with the synthetic.
 
What is so interesting and scary about this discussion is how ignorant the average "professional" broker/brokerage is about synthetics. By establishing "levels" they are really forcing the retail customer into often more dangerous trades than if they were allowed the natural. ALL defined risk trades should be allowed in ALL accounts including IRA's and with margin accounts ALL marginable trades should be allowed. Simple as that.
 
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