Optin Box close
Welcome to the Options University Blog

This is no ordinary ebook. Options 101 just hit the bookstore shelves all over the country. It's available at Amazon.com and BarnesandNoble.com and we've been told it's the 'best options book on the market today'.

Because we feel that a proper foundation in options is critical to your success,
We'd Like To Offer You
3 FREE Chapters
of Our NEW Book
Options 101:
From Theory to Application
by Options Expert Bill Johnson
To get your 3 FREE chapters, simply enter your name and email address below, and we'll send these to you right away
(You'll have them in your email inbox instantly!).
"It's fun for me to spend time with people that are really bright and passionate about something that I love as well. Options University has done a wonderful job of getting their message across in an easy to understand way. I hope this is the first of many..."

Tom Sosnoff
thinkorswim, inc.
Name:
E-mail Address:

Aug

14

Advanced Options Trading - More on Synthetic Stock

Filed Under Advanced Options Trading 

More on Synthetic Stock
 
We know that if we want to simulate an option position that will exactly mimic the movement of the underlying stock, we can but we need to buy an at-the-money call and also buy the corresponding put. We do this because corresponding option contracts produce 100 Deltas and cancel out all the other Greeks. In effect, the position becomes a low cost, time limited simulation of the stock. If the stock moves up $1 the position will move up $1. If the stock moves down $1, the position will move down $1. It is, indeed for the option period a perfect surrogate for the underlying stock.
 
OK, but why would an option trader want to use a synthetic stock position? As Ron Ianieri of the Options University states: “whenever a trader decides to use the synthetic position instead of the real position, it’s because there’s some type of “volatility skew” creating one way to be cheaper than the other way (owning the stock) yet we know that both ways are the same”. In other words, a synthetic position can provide better pricing and higher profits.
 
To be more specific, there is something called a “put/call skew”. There is a negative and a positive put/call skew. When a corresponding call is selling for a higher price than its corresponding put, you have positive skew or vice versa when you have a negative skew. Either way, the skew produces more favorable pricing which allows for more profit than the actual purchase of the stock. It’s not a huge amount, but for an active options trader, the advantage can add up over time.
 
Synthetic Short Stock
 
Just as we have a synthetic long stock, we also have a synthetic short stock position.
It’s no surprise that the construction of the synthetic short stock position is opposite the construction of the synthetic long stock position. In the synthetic short stock position, we’re going to be long the put and short the call in a one to one ratio.
 
So, to create a synthetic short, a trader would buy a put which makes you short and then sell the corresponding call which also makes you short. Needless to say, both put and call must be corresponding options and at a one-to-one ratio. Since they are corresponding, they have Deltas that will total negative 100 and Gamma, Vega and Theta that will cancel out. Let’s look at an example.
 
Suppose you sold a real stock for $67.50 and it went down to $63.50. In this case, you made $4. To construct a synthetic short position, you would pick the closest strike and go short the call and long the put. The closest strike is $65 and you sold the call for     $3.32 and now it’s worth $1.09 In this case, you made $2.25 on the call. The put, on the other hand, you purchased for .77 cents and it’s now worth $2.53; a profit of $1.76. The call and the put equal a total profit of $4.01. >That’s the same as selling the stock; however, it was much cheaper to sell the call and buy the put. (Keep in mind that unless you actually own the stock, most brokerages will not let a retail client sell unhedged short positions.)
 

To find out more about synthetic stock and much more, contact the Options University at www.optionsuniversity.com

Share This

Comments

Leave a Reply

You must be logged in to post a comment.

Close
E-mail It