What is your favorite way to manage a synthetic that is working? For example, let's say that in July I set up some long Dec synthetics on XYZ when it is trading at $50: - 50 Dec P +50 Dec C Now, it is August and XYZ has risen to $60. Suppose that: 1) XYZ is not a particularly volatile underlying, so this is a pretty big move. [If XYZ were especially volatile, I would not have been messing with this type of trade in the first place. I would have stuck to spreads or just bought XYZ itself.] 2) the technicals for XYZ are still fairly strong, or at least not deteriorating substantially 3) XYZ options are heavily traded so that slippage will be minimal. Here are some of my choices; you may decide to suggest others as well: 1) exit the trade and take profit 2) buy a Dec 60 put 3) buy a Sep or Oct 60 put, decide later when that is expiring what to do next 4) buy a Dec 55 put (or Sep or Oct) 5) buy in the Dec 50 puts and let the Dec 50 calls run 6) buy in the Dec 50 puts and sell enough Dec 50 calls to pay for them, keeping the rest of the calls 7) do nothing 8) do some combination of the above You can tell me that the right move depends on my expectations for XYZ. But of course I, like everyone else on the planet, do not know what XYZ will do next. And also like everyone else, I want to have my cake and eat it, too. I can tell you that in the past I have favored choices 2, 5, 6, 7, and 8. Before you tell me to always take the bird that is in the hand, keep in mind that synthetics do not always work, and that my winners have to more than make up for my losers. So I think it's important to not lop off your profits too quickly here. Looking forward to hearing everyone's thoughts.
With the recession and ongoing changes in Washington DC, government spending is headed higher and tax revenues have dropped. The escalating budget deficit is starting to threaten the U.S. dollar and Treasury market. The 2010 mid-term elections may slow down big-ticket tax increases on the upper class, and the Bush administration tax cuts on that group expire in 2011. Politicians are hungry for new sources of revenue, and unfortunately one group they are targeting is traders and banks. Several health-care and jobs proposals or bills have included a financial-transaction tax and/or increases to long-term capital gains tax rates; rising from 15 to 20 percent with repeal of the Bush tax cuts and the House's health care bill proposed raising the rate further to 24 percent.
This important second petition focuses on all market users, including retail investors, farmers, and other industries. We are hoping this petition jump starts our efforts again. We don't have a budget to advertise or use lobbyists and our success as a trading community will be a result of our joint social media and viral marketing efforts. It's free to do, but it takes some work. Please help us and help yourself too.
As you noted, the right move depends on your expectations for XYZ. Given that we don't KNOW what will happen, my game plan is always to lock in profits. I could live with any of your suggestions but my if still bullish, of them I'd lean toward #3, locking in gain and allowing further upside (buying nearer term ATM put). I think that if bullish, my preferred plan of attack would be to roll the synthetic up every 5 points, booking 5 pts (synthetic has delta of 100). 50 then 55 then 60 etc.
A synthetic long should be treated as the natural. If you don't like it, sell it. It's vol-neutral. The only reason (IRS excluded) to be in the long synthetic over the natural would be a discount. Then it's simply a matter of trading the reversal in as much size as possible.