AA, Its not that that I've had to resort to doing this... Its that this is a valuable tool that a professional daytrader (and I don't mean swing trader), should have. If you have a chance to go down to one of the Regional Exchanges one day (I am close to the Pacific Exchange) and talk to some of the traders on the floor who trade proprietary accounts, you'll find that they have been using Conversions and Bullets for years. Why? Because it is the only way to legally "short" a stock once it starts to tank. Perhaps, every now and then, you are lucky enough to get an uptick AND be one of the luck few that actually is able to get a short off once a stock has already started moving down, but otherwise, if you don't have a conversion, you have to short a stock in ANTICIPATION of it tanking...and that is not daytrading, that is more like short term Swing Trading. Now I don't want to get into a debate about the merits of daytrading vs. swing trading, but I will say this: I have met a lot of Professional Traders who have worked on the floor of the Pacific Exchange (some have been Specialists and Assistant Specialists for years)... and I'm sure that all of them would tell you that not having a conversion/bullet in the stocks that they regularly daytrade would decrease their profitability by at least 35-40% (if not more). Personally, I believe that this is one of the main reasons that so many daytraders (in the retail sector) have failed. Obviously, daytrading is difficult and I'm not going to argue that it isn't. However, its not impossible to make a living at it. Like I said before, traders on the floor (before the days of the internet) have been making a living doing daytrading for years. And most of the traders that I know are still making consistent profits even during recent market turmoil. Why? Because they have the necessary tools to trade with. I know a trader that has been using conversions for over 9 years, but the average so-called "daytrader" has never even heard a bullet or a conversion. It all goes back to having the proper education, being trained well and properly disciplined, and having ALL the necessary tools to trade with. And while you may be able to tade without utlizing derivative combinations such as bullets and conversions, your chances of being consistently profitable will probably decrease dramatically. Now if you are a swing trader, you are probably right. It is probably hard to justify the expense of carrying a position like this when you may execute just a few trades a day in the same stock. And if you are not looking to scalp for eighths and quarters, then you also probably don't need to worry about something like this. But in my opinion, a real daytrader who executes several trades a day in the same stock every day, is trading at a big disadvantage without a bullet or a conversion.
MM - just curious what your definition of a daytrader is (since there's a bunch of different trading methods that are all "daytrading") that would benefit from using this kind of combo? Couldn't tell if that was a typo or if you intended to mean scalping for fractions was the focus. I believe that most off the floor scalpers fail for a bigger reason than not using an option combo to facilitate shorting without an uptick - it's mainly because scalping off the floor is just generally a losing game. What works for a floor trader doesn't always translate to what off the floor traders can do effectively (e.g., what the futures floor traders I've worked with can do vs. what the off floor trader can easily do is pretty different - but since there's no uptick rule in futures, trying to use a combo to facilitate shorting isn't an issue). Would be interested to get your view on what daytrading methods you believe would most benefit from using a combo position to facilitate shorting. Did you mean it was mostly for scalping or did I misinterpret? Thanks - the info has been very interesting.
Market Master said: Some people call them bullets and some traders call them conversions... but basically they are synthetic shorts.. and here is how they work: You buy 100 shares of a stock and you also buy a put on the same stock. Now basically, you are flat because if the stock decreases in value the put you own increases proportionately, and of course if the stock increases in value your put decreases proportionately. This is basically called a synthetic short. ------------------------------------ unless I'm missing something, you are incorrect in calling that position a synthetic short A synthetic short is one where the graph (p/l against stock price) is equal to a short position (heading up to the left) A synthetic short is : long put + short call (1:1 ratio) am *I* missing something??!?
Buying a deep ITM put + selling deep ITM call leaves you short 200sh. Isn't this just an ITM version of a collar? Wouldn't you have to buy 200sh to get to zero? Why buy both a put AND sell a call? Why not just buy a put and buy 100sh?
I think the real question surrounding the equivalency of these has to do with the delta of an option. Typically, the delta of an ATM (At The Money) put or call is +-50. That means for every point the stock moves, the option moves by 1/2. So, buying 100sh and 1 put ATM leaves you with a delta of 50. Buying that second put or selling that call will produce the -50 to make you "delta neutral." Deep ITM (In The Money) options will have a higher delta and move almost 1:1, but it has to be really deep in the money with little time value remaining.
Hi the _dude the reason why you would normally sell the call to put up a reversal ( or reverse conversion) is to recoup the time value you are paying for the put that you bought as a hedge against your long stock. Ex: you buy IBM is at $92 and the June 100 put was bought for 9, this means the put has intrinsic value of 8 and time value of 1. If you do not sell the call, you can short IBM without upticks BUT as time passes the time component of your put (which you own) erodes so you slowly lose $. If you had sold the call at the same time you bought the IBM and put, any erosion of your put time component is recouped by the erosion of the call time component of which you are short. That is why you sell the call. And sometimes, I don't even sell the call since the deep ITM put has very little time premium so selling the call for 25 cents is not worth it due to commision. The best scenario is when you don't sell the call and then a week later the stock goes up by a good amt then you sell the call which has now appreciated 500% !!! Hope this helps.
Well, there seems to be some confusion here on bullets(at least for me). I don't trade at a pro firm but I'll say what I think I know and let the experts correct me. Hope to get some replies from Bright or Echo people who are using bullets. In review, Bullet is an option position, so unaffected by uptick rules. Bullet is long put/short call(both bearish positions). Bullet increases in value as stock drops. Bullet are bought "pre-assembled"per share, expire end of day. Re: "Why not just buy a put?" I was under the impression that the short call paid for the long put. Isn't that why you can get bullets so cheap? I read that bullets are .03 per share at Echo. If you just buy a put, you're going to pay over 1.00 per share. So, is a bullet a ATMput/shortOTMcall OR ATMput/shortATMcall ? If it's the latter, then don't firms profit just offering bullets (since calls generally cost more than puts) So, are there dealers in the option pits that sell bullets to firms? Some pro firms apparently charge as much as .30 a bullet. I would think bullets would be great for intraday swing trading(1-2 roundtrips per stock per day). Especially since they're pre-assembled(speed) So, do you start dumping the stock after you buy the bullet(assuming stock is dropping)and then sell the bullet(closing sale)? OR Do you exercise the bullet(put)? If you're left holding the bullet after you dump the stock you could be in trouble if the stock really whipsaws, right? Sorry for the long post and weird formatting. Still getting used to the vB(notice I used bullets to talk about bullets ?) Feel free to cut my post to shreds if I misstated anything. Thanks
Babak wrote: A synthetic short is one where the graph (p/l against stock price) is equal to a short position (heading up to the left) A synthetic short is : long put + short call (1:1 ratio) am *I* missing something??!? No, you're correct, when you sell the stock from the conversion you are left long put+ short call. I think the point was made that it is a stock you trade almost everyday, and the conversion is a way to short without the uptick. Also the point was made that everytime you sell the stock and hopefully buy it back lower you are profiting by the long put and the short call adding to your profit as the stock price falls and as you trade within the conversion. AA wrote: have a $100K minimum equity and a lot of option experience before they'll let you hold naked short calls. $100k sounds like alot of margin, however you can still trade with a married put, long stock and deep ITM put. The premium on the put would be low enough that you wouldn't have to sell calls, but you would have to go to expiration to avoid the prohibitive spread on the bid/ask, but still be able to sell stock without an uptick being short via the long put. You would always have the stock and put in your account, and if the stock were to go up strongly you could sell calls(not naked, you own the stock)and now you have a lock. No matter were the stock goes out at expiration you keep the call premium and either exercise your put or you're assigned on your calls
Bullets are simply one day contracts for the exercise of a given number of shares of stock. Conversions are the the 3 way (long put, short call, long stock) used by traders who trade in the same stocks day in and day out. Either way, you sell the stock, buy it back and make money from the difference (provided you bought it back at a lower price).