Ok I have some reading to do apparently over the holidays. KEY TAKEAWAYS A synthetic option is a way to recreate the payoff and risk profile of a particular option using combinations of the underlying instrument and different options. A synthetic call is created by a long position in the underlying combined with a long position in an at-the-money put option. A synthetic put is created by a short position in the underlying combined wit a long position in an at-the-money call option. Synthetic options are viable due to put-call parity in options pricing. Ok so what you are saying is I can purchase shares, and then purchase a long put and have a synthetic "Box" arb that will have no affect from the greeks? I still have to purchase the put, and the put would have to be deep itm to be a 1 delta, so for instance with AVGO if I bought 100 shares today at 1121.98 it would cost $112,198, to create a synthetic box I would have to purchase the 1230 strike put @ 110.50 at a cost of $11,050. This would give me a 0 delta on the position with very little exposure to time decay...and I just keep rolling out the put option for as long as I hold the underlying? All the while I can sell calls on the underlying? Yes so that's what I am already planning to do with my wheel strategy, the problem is if you don't get the 1 delta put then it won't sufficiently protect your position...especially on those 6% days where your underlying will be so far otm that you can't turn a profit anymore selling calls...and if you do go deep enough for 1 delta then you are paying premium for it, and you are losing the bid/ask spread every time you rollout. P.S. The irony of "your dumb" was not lost on me.
You don't start the day pricing synthetic-relationships. No counter-party is expecting a large arb-condition to appear from flow. IOW they expect that you're going to know enough to act in your own self-interest. The hedge resulting from flow is generally not going to be a conversion or box. The utility for someone new is to not be pot-committed to a specific call, vertical, etc., solely due to the price of the shares because you're literally throwing money away. If you simply looked at AVGO's share price you would arrive at calls being overpriced relative to puts. Start with pricing the synthetic on the date in question. In AVGO the synthetic is priced to 126.5. Long call(put), short put(call) at a strike. Best to use something near-ATM.
Buy stock,buy put = synthetic long call..Thats not a box arb..Box Arb no longer exists,except for a few basis point here and there..If you sell the call at the same strike,its called a conversion.. You are going to get clipped trading/rolling 100 dollar + options.. Arent you a directional guy?? Why are you trading retail strategys? Des must be in the holiday spirit
The short call spread will be profitable if the stock price moves up a lot, up a little, nowhere, and down a little. The long put spread will only make money if the stock goes down a lot. Thats a 4:1 probability of profit favouring the short call. It would have to close x amount itm before I even lose on it...with the long put it has to finish x amount itm before you gain...big difference.
Ok I am going to read this over the holidays so we can be on the same team Merry Xmas! Yes, but I'm trying to find a way to earn some income monthly that does not put much capital at risk during a downturn. I have enough in buy and hold etc. Merry Xmas!
How so? Because of skew etc and since the drop in the 80's that puts generally are more expensive that calls. ok so in this scenario you are looking for this relationship of "parity" to skew (smirk/smile) back to normal so selling premium on the calls would be an idea. Dumb question I'm sure, but how do you know the skew will reveal itself via calls getting less expensive or puts becoming more expensive? Continuing on...you don't so the play is to box them in and shave off the difference when the skew reveals itself. Example. Sell a call and buy a put which are currently at parity...then when the skew returns you will be able to close your call for less, or sell your put for more...either way you profit.
The short call spread will be profitable if the stock price MOVES UP ALOT, up a little, nowhere, and down a little.... Ok... I think I see whats happening here... Quick questions Scenario 1; Are you trolling? Scenario 2; How F-N Dumb are you ??