Option Trading Articles: RE: [ConservativeOptionStrategies] Synthetic Call Strategy

Wednesday, December 2, 2009

RE: [ConservativeOptionStrategies] Synthetic Call Strategy

As the price drops the delta of the option will drop. But it does give you enough room to continue to write calls, limits and defines your loss. Your income from the short would pretty much limit the loss on the long. It keeps your losses under control.

--- On Wed, 12/2/09, Kenneth Ginsberg <ken_ginsberg@yahoo.com> wrote:

From: Kenneth Ginsberg <ken_ginsberg@yahoo.com>
Subject: RE: [ConservativeOptionStrategies] Synthetic Call Strategy
To: ConservativeOptionStrategies@yahoogroups.com
Date: Wednesday, December 2, 2009, 3:07 PM

Jocelyn:

A quick question. I am not sure how a stock with a delta between .8 and .9 acts like cash. Wouldn't the delta of .8 or .9 mean that the options premium will pretty much track the stocks price movement dollar for dollar (or at least 80-90% of the move). So if the stocks price drops say 10%, you would lose 8-9% on the long call. How would this be like cash (which I am hoping doesn't lose anything no matter what happens to the market or any individual stock)?

What am I missing here?

Thanks.

Ken

From: ConservativeOptionS trategies@ yahoogroups. com [mailto:Conservativ eOptionStrategie s@yahoogroups. com] On Behalf Of Jocelyn Palmer
Sent: Wednesday, December 02, 2009 8:58 AM
To: ConservativeOptionS trategies@ yahoogroups. com
Subject: [ConservativeOption Strategies] Synthetic Call Strategy

First, let me say thank you for letting me migrate from justcovered calls to discuss a strategy that I have been working on for the last few months. It doesn't belong at justcoveredcalls, but is what I think is the next step in options for income and growth.

This is what I have been telling those who are interested in this strategy. I have placed a file at this site titled Synthetic Trading Plan. It is available for download. SD stands for Standard Deviation.

The trick is to select channeling stocks. The long must have a delta between .90 and .80 and be 6 to 8 months out. This way it will act like cash. LEAPS are too far out. I think that this is where many go wrong. You pay too much for LEAPS. You can trade ETF's with this, but they don't generate the returns that individual stocks will. Try to stay out of an earnings month.

There are many places to find appropriate candidates, but Google Finance has a free stock screener that will do the trick. Google Finance/Stock Screener. Then search using market cap, beta, price, and avg volume. You need large cap, liquid stocks with a price of $60 or more. The beta is a range of .6 to 1.2. Currently, I am trading POT, HES and MOS. Other good candidates would include IBM and PEP. I know broke the rule with HES. HES is less than $60, but it is a stock that I am familiar with and I have been successfully doing covered calls for months with this stock.

After you have examined the Synthetic Trading Plan at the files section, feel free to ask questions. I will help where I can. Disclaimer, the risk is all yours. Do your due diligence.

Jocelyn