From: joe & leigh <gass20@aol.com>
To: ConservativeOptionS
Sent: Sat, Apr 10, 2010 7:01 am
Subject: [ConservativeOption
are you selling short calls against long calls on a one to one basis? if you are once your short calls go in the money your leaps at delta of 0.8-0.9 can appreciate as much as your short calls and rolling is extremely important. i do have a paper in the file section describing how i trade diagonals...
--- In ConservativeOptionS
>
> David,
> Â
> Thank you for that thoughtful reply. As we all know, webboard communications don't necessarily lead to civil discourse or complete understanding.Â
> Â
> I am in an options mentoring course currently and this diagonal strategy is presented as an alternative to covered calls. Long call + short call = synthetic covered call. It is a bullish directional strategy. It has also been called a fig leaf. In my case, it is not done with a long leap call, but rather a long call about six months out with a delta of .80 - .90. The short call is sold during the current month and traded out of the money. It is rolled up, down or forward and closed as necessary.
> Â
> I think that the reason the term synthetic was used to describe this strategy was because it is a substitute for a covered call strategy without the stock. This is a broad description rather than an exact definition. That is the distinction. To an academic, to use this term in this way is like listening to fingernails on a chalkboard.
> Â
> The strategy itself is sound. It is a long term monthly income strategy that is bullish in its direction and designed to harvest theta decay. I have had some success in this current market with the strategy. Initially I did not understand the importance of entry timing. Luckily the market has proven forgiving while I learn. I thought I would be making most of my money on rolling the short. Actually, most of my gains seem to have come from appreciation of the long. Thus, rolling the short is less important than I initially thought. Rather than rolling the short, I find myself closing out the entire position for a profit. Skews and arbitrage are not elements that enter into this particular strategy.
> Â
> I suspect that there are as many permutations of this strategy as there are people trading it. That is why it is so hard to define.
> Â
> Jocelyn
> Â
> Â
> Â
> Â Â Â Â Â Â Â
>
> --- On Sat, 4/10/10, David <david135@..
>
>
> From: David <david135@..
> Subject: Re: [ConservativeOption
> To: ConservativeOptionS
> Date: Saturday, April 10, 2010, 6:58 AM
>
>
> Â
>
>
>
> 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 is they are the same strike and month. Also note
> 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@yahoo. com>/* wrote:
> >
> >
> > From: scott volkers <flyspv@yahoo. com>
> > Subject: Re: [ConservativeOption Strategies] Diagonials
> > To: ConservativeOptionS trategies@ yahoogroups. com
> > 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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