David,
Thanks for a great post. Very well done.
Michael
www.safe-options-
--- In ConservativeOptionS
>
> Hi Jocelyn,
>
> I would never call anyone stupid for not understanding synthetics. I
> traded options for more than 10 years before I caught on. Most
> organizations that even bother to teach synthetics consider it a highly
> advanced, post-doctoral level subject. Only brainiacs and people with
> seriously deep pockets need apply. In fact it should be part of Options
> 101 and taught along-side the hugely complex topic of buying a call (or
> put). If you're bright enough to buy a call, you should know that buying
> a synthetic call is an alternative.
>
> Here are the basic synthetic equations:
> long stock + short call = short put
> short call + long put = short stock
> long put + long stock = long call
> short stock + long call = long put
> long call + short put = long stock
> short put + short stock = short call
>
> Note that each equation contains a stock, a call and a put.
> Also note that the call and put in each each equation are
> "corresponding.
> that the "=" is an approximation. To get it exactly equal you have to
> make an adjustment for "cost of carry" (dividend & interest) and
> put/call skew. Currently interest is about 0, so dividend and put/call
> skew are the primary influences. Dividend can be looked up many places
> and put/call skew is the result of the difference in implied volatility
> of the call and the put. Also easily identified. When the equations get
> out of whack a few cents the market makers or anyone else with a near 0
> commission will force it back into balance by buying a real (stock, put
> or call) and selling the synthetic (stock, put or call). Or the reverse.
> It's called an arbitrage and is a guaranteed profit. If you buy a call
> and sell a synthetic call for a credit, you have a risk-free guaranteed
> profit at the instant you do it. No pain no strain, just money in the
> bank. For the retail trader the cost of the commission + B/A spread is
> typically more than the arbitrage opportunity.
>
> When putting on a position, it doesn't hurt to compare the real to the
> synthetic. As often as not, you can buy a nickel or dime cheaper getting
> in and sell a nickel or dime better getting out. Or vs. The real and
> synthetic never get far enough out of whack for the retail trader to
> take advantage of the arbitrage, but you can pick off a nickel or dime
> here and there nevertheless.
>
> If you are considering paying for trading/options education, ask if they
> teach synthetics. If they don't teach synthetics as part of the basic
> package you're being scammed. Synthetics should be taught well before
> anything as complicated as a spread (of any type).
>
> Keep in mind that anytime you are short anything real (as part of a real
> or synthetic position) you are subject to the whims of the other party.
>
> regards,
> david
>
>
>
> Jocelyn Palmer wrote:
> >
> >
> > Watch out call it a synthetic. I was yelled at, told I was stupid, and
> > taken to task for using this term on this web board. It quelled my
> > enthusiasm for sharing with the group.
> >
> > I use the strategy, but with varying degrees of success. I am still
> > working out the details of management, so I hesitate to offer any more
> > opinions. Initially, I thought that I would roll the front month for a
> > few expirations, but I have discovered that it is better to close the
> > entire spread and reset. I am not sure if that is a symptom of the
> > current market condition or not.
> >
> > Jocelyn
> >
> > --- On *Wed, 4/7/10, scott volkers /<flyspv@...
> >
> >
> > From: scott volkers <flyspv@...>
> > Subject: Re: [ConservativeOption
> > To: ConservativeOptionS
> > Date: Wednesday, April 7, 2010, 2:02 AM
> >
> >
> > Hi Tom,
> >
> > I had looked at that and yes it is considered a synthetic covered
> > call. I have found it locks up a lot of capital, but I find it
> > hard to find enough premium to make it worthwhile on the short.
> >
> > I have traded diagonals and calendars more. I am curious if you
> > are targeting certain historical volatility or IV as part of the
> > formula. Calendars I shoot for conservative 15% return and exit.
> >
> > Scott
> >
> > ------------
> > *From:* Tom Clark <tec@thomark. com>
> > *To:* ConservativeOptionS trategies@ yahoogroups. com
> > *Sent:* Tue, April 6, 2010 11:36:01 AM
> > *Subject:* [ConservativeOption Strategies] Diagonials
> >
> >
> > I don't see the diagonal strategy discussed here. Diagonal - short
> > front month call covered by DITM long call 9 to 15 months out. I've
> > also heard this call a synthetic covered call. I've been very
> > successful using this spread over the past year both for individual
> > stocks & ETF's. Are there others here using this strategy? Care to
> > share your comments?
> >
> > Current positions - XLF, IYR, MDY
> >
> > Thanks
> >
> >
> >
> >
> >
> >
>
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