I wouldn't agree that they're more dangerous but certainly less advantageous for the customer. You're right though. It is laughable that most brokerages (and exchange educational material) lists covered calls as a low risk conservative strategy and naked puts as a high risk aggressive strategy.
Writing Covered Puts
- Thread starter exQQQQseme
- Start date
I wouldn't agree that they're more dangerous but certainly less advantageous for the customer. You're right though. It is laughable that most brokerages (and exchange educational material) lists covered calls as a low risk conservative strategy and naked puts as a high risk aggressive strategy.
Michael, for purposes of going ahead with this discussion, let's both agree that we are both people of above average intelligence, and that each has a solid knowledge and experience in trading both equities and options. Also, that we both fully understand the 4 basic options Greeks: Delta, Gamma, Vega, and Theta. Beyond that there may or may not be differences. I have a full time job and therefore cannot, nor do I want, to ever trade options for a living. Finally, let's both agree that we are both strongly driven by the desire to make money trading and both have an equal aversion to loosing, but both understand the need to take and manage risk.
Having said all of that, let's first dispose of the commission/spread issue, which we can collectively call transactional costs. No doubt that this can mount up. Yes, the synthetics you are suggesting do involve fewer "legs" than what I am doing. However, I believe that this is offset by (1) fewer total transactions and (2) lower transactional costs because I am using equities to a larger extent than you are. If we cannot agree on t his point, let's just say it 's even and move on to the next part.
In this connection, most of what I have posted about relates to one stock, AAPL. This is difficult to communicate here on the ET Board where so many are so dedicated to synthetics, but when I do my AAPL trading, I don't look at it, nor do I measure my success or failure, on a trade by trade basis. Rather I look at it as a long term chess match between me on one side of the board and the Markets on the other side of the board. I try my very best to stay one or two steps ahead of the market. When I contemplate my future moves I think in terms of buying or selling either the options or the underlying, and what such moves would have on my adjusted net position. Fortunately, in this day and age, I have electronic tools at my disposal, but I won't go into any details on this now, because this posting is not a commercial.
So, bottom line is: If I carefully contemplate my future moves contingent on what the market first does, I don't think what I am describing lends itself to contemplating synthetic alternatives. I totally understand and respect that there are those who feel very strongly in favor of the use of synthetics. That's wonderful. But it doesn't mean that those of us who don't share those strong feelings are somehow inferior as options traders merely because we don't share their passion for those concepts. It also doesn't mean that, as some have accused me of, we totally disregard the synthetic equivalencies. It just means that we don't place the same emphasis nor do we devote the same amount of time to them.
In conclusion, I have no animosity toward those who disagree with me. But let's face it, you nice folks are not the ones on the other side of that hypothetical chess board from me. Hell, there's enough room in this options game for all of us to prosper if we both concentrate on hard work, self control, and patience.
Having said all of that, let's first dispose of the commission/spread issue, which we can collectively call transactional costs. No doubt that this can mount up. Yes, the synthetics you are suggesting do involve fewer "legs" than what I am doing. However, I believe that this is offset by (1) fewer total transactions and (2) lower transactional costs because I am using equities to a larger extent than you are. If we cannot agree on t his point, let's just say it 's even and move on to the next part.
In this connection, most of what I have posted about relates to one stock, AAPL. This is difficult to communicate here on the ET Board where so many are so dedicated to synthetics, but when I do my AAPL trading, I don't look at it, nor do I measure my success or failure, on a trade by trade basis. Rather I look at it as a long term chess match between me on one side of the board and the Markets on the other side of the board. I try my very best to stay one or two steps ahead of the market. When I contemplate my future moves I think in terms of buying or selling either the options or the underlying, and what such moves would have on my adjusted net position. Fortunately, in this day and age, I have electronic tools at my disposal, but I won't go into any details on this now, because this posting is not a commercial.
So, bottom line is: If I carefully contemplate my future moves contingent on what the market first does, I don't think what I am describing lends itself to contemplating synthetic alternatives. I totally understand and respect that there are those who feel very strongly in favor of the use of synthetics. That's wonderful. But it doesn't mean that those of us who don't share those strong feelings are somehow inferior as options traders merely because we don't share their passion for those concepts. It also doesn't mean that, as some have accused me of, we totally disregard the synthetic equivalencies. It just means that we don't place the same emphasis nor do we devote the same amount of time to them.
In conclusion, I have no animosity toward those who disagree with me. But let's face it, you nice folks are not the ones on the other side of that hypothetical chess board from me. Hell, there's enough room in this options game for all of us to prosper if we both concentrate on hard work, self control, and patience.
Not always. If i am flipping spot against a long option(gamma scalping) it is advantageous to use the synthetic vs the natural assuming the spread on the spot is better than the -edge of the natural. There is a place for everything, even synthetics.
QQQQ -> you are correct, if you are content with paying more in commissions or edge, synthetics are of no value to you. Synthetics are used to dissect a large option portfolio so that the risk is easily identified as well as to minimize losses from extra -edge and commissions. Neither one seems to apply in your case. So keep trading whatever works for you but you will undoubtedly keep hearing about synthetics regardless.
Bob,
I mean no disrespect to you nor your intelligence. However, I don't see how intelligence, experience, or knowledge of greeks has any relevance on the reality of synthetics.
My post is specifically related to your post in which you state that you initially sell stock and buy twice the calls. This is a synthetic straddle. How you manage the position afterwards is irrelevant to the fact that the original position is synthetic and thus more expensive. Any adjustments made afterward can be done on either the synthetic or the natural with the same outcome.
In other words 2 + 2 = 4 no matter which appendages I use to do the counting. In most cases synthetics are more expensive than the natural position.
If you're entering a position with a single leg and then convert at a later time to a synthetic (for any strategic reason) then I concede I've misinterpreted the discussion and apologize for wasting time.
If you are indeed initiating your position as a synthetic then by all means continue to do so. Just be aware that you're giving away money. Kinda like buying American cars because your friends with the mechanic.
I mean no disrespect to you nor your intelligence. However, I don't see how intelligence, experience, or knowledge of greeks has any relevance on the reality of synthetics.
My post is specifically related to your post in which you state that you initially sell stock and buy twice the calls. This is a synthetic straddle. How you manage the position afterwards is irrelevant to the fact that the original position is synthetic and thus more expensive. Any adjustments made afterward can be done on either the synthetic or the natural with the same outcome.
In other words 2 + 2 = 4 no matter which appendages I use to do the counting. In most cases synthetics are more expensive than the natural position.
If you're entering a position with a single leg and then convert at a later time to a synthetic (for any strategic reason) then I concede I've misinterpreted the discussion and apologize for wasting time.
If you are indeed initiating your position as a synthetic then by all means continue to do so. Just be aware that you're giving away money. Kinda like buying American cars because your friends with the mechanic.
Quote from rallymode:
Not always. If i am flipping spot against a long option(gamma scalping) it is advantageous to use the synthetic vs the natural assuming the spread on the spot is better than the -edge of the natural. There is a place for everything, even synthetics.
I'm not following. Are you referring to the synthetic on the long option or synthetic on the gamma scalp? When would the spread on spot be better than -edge on the natural?
Thanks
Michael, No, I didn't say that. Go back to the first page of this thread. It was in a posting by Smilingsynic, in which he said that one of his favorites was shorting the stock and shorting two puts against it.
I don't believe I ever said short 100 shares of the stock and buy two calls. But it is something I might consider. It is essentially delta neutral and gamma positive. But theta is the killer. Truth is I've never done all that well with straddles.
I don't believe I ever said short 100 shares of the stock and buy two calls. But it is something I might consider. It is essentially delta neutral and gamma positive. But theta is the killer. Truth is I've never done all that well with straddles.
Sorry Bob, I must have misunderstood you. In the first post on page 8 you describe buying calls and selling stock. My posts were in reference to that position. I apologize for wasting space here...
Hi Michael. No posting that relates to the subject under discussion is a waste of space. Regarding the Page 8 posting, my intention in that posting was to limit my comments to the narrow issue of balanced deltas and positive gammas.
Just think, wouldn't positive gammas be wonderful if they were not offset by negative theta? LOL
Bob
Just think, wouldn't positive gammas be wonderful if they were not offset by negative theta? LOL
Bob
MTE, on January 17th you responded to me by saying, "Whether you short the stock and short the put or just short the call you are short the same amount of vega. So, IV has no impact on the choice of one over the other. But I'm sure you already know that and it was just a typo in your post."
I agree with your first two sentences completely. Perhaps, it was my fault, but your response was not to the factual situation I was talking about in the particular posting of mine that you were quoting.
In that posting I was beyond the covered put write which I started this thread with. What I had in mind was a situation when one starts by shorting 800 shares of a stock. At that beginning point, the result is that those short 800 shares represent 800 negative deltas. Let's say that at this point in time, even though the trader has a negative bias toward the stock, they want to do something to create some additional positive deltas, and at the same time leave the shorted 800 shares alone. The way I see it they can either:
a. buy calls
b. sell puts
c. a combination of a and b.
The only point I was making in the posting which you quoted was that in deciding between a. and b., that it would be prudent to consider IV. Matter of fact, just last week with AAPL, when the IV spiked, I wrote 8 current month ATM Puts. The fill I got carried an IV of 62, whereas without the spike, those same puts would have been in IV in the low 40's or high 30's, where the comparable puts are today. I purchased back those puts early this week after the IV tumbled. At the time it seemed to be a nice IV play, and it turned out quite well.
To summarize, what I intended to say was when faced with a decision between BUYING Calls and SELLING Puts, IV should be an important consideration. Sorry if I was misleading. You assumed a typo error which did not exist.
I agree with your first two sentences completely. Perhaps, it was my fault, but your response was not to the factual situation I was talking about in the particular posting of mine that you were quoting.
In that posting I was beyond the covered put write which I started this thread with. What I had in mind was a situation when one starts by shorting 800 shares of a stock. At that beginning point, the result is that those short 800 shares represent 800 negative deltas. Let's say that at this point in time, even though the trader has a negative bias toward the stock, they want to do something to create some additional positive deltas, and at the same time leave the shorted 800 shares alone. The way I see it they can either:
a. buy calls
b. sell puts
c. a combination of a and b.
The only point I was making in the posting which you quoted was that in deciding between a. and b., that it would be prudent to consider IV. Matter of fact, just last week with AAPL, when the IV spiked, I wrote 8 current month ATM Puts. The fill I got carried an IV of 62, whereas without the spike, those same puts would have been in IV in the low 40's or high 30's, where the comparable puts are today. I purchased back those puts early this week after the IV tumbled. At the time it seemed to be a nice IV play, and it turned out quite well.
To summarize, what I intended to say was when faced with a decision between BUYING Calls and SELLING Puts, IV should be an important consideration. Sorry if I was misleading. You assumed a typo error which did not exist.
Intrinsic and Extrinsic Value Computations - Excel Spreadsheet
With many of these convoluted combinations that I frequently find myself with, I often use an Excel spreadsheet to keep track of certain figures which are important to me. Many times I want to know both the intrinsic and extrinsic value of Puts or Calls.
I have developed a very simple small Excel template, which can either be used by itself or as part of a more complex spreadsheet. What one does is put in the basic variables such as:
a. the current market price of the underlying,
b. the current market price and strike price of the Call, and
c. the current market price and strike price of the Put.
When you hit "Enter", the spreadsheet instantly shows the intrinsic and extrinsic.
I am happy to make this avail to anyone who requests. Just send an email to me at exQQQQseme@aol.com, and I will send the spreadsheet back to you, usually within a day or two.
Bob
With many of these convoluted combinations that I frequently find myself with, I often use an Excel spreadsheet to keep track of certain figures which are important to me. Many times I want to know both the intrinsic and extrinsic value of Puts or Calls.
I have developed a very simple small Excel template, which can either be used by itself or as part of a more complex spreadsheet. What one does is put in the basic variables such as:
a. the current market price of the underlying,
b. the current market price and strike price of the Call, and
c. the current market price and strike price of the Put.
When you hit "Enter", the spreadsheet instantly shows the intrinsic and extrinsic.
I am happy to make this avail to anyone who requests. Just send an email to me at exQQQQseme@aol.com, and I will send the spreadsheet back to you, usually within a day or two.
Bob