In which strategy, You buy a stock, sell a call and buy a put of the same strike?

Discussion in 'Options' started by crgarcia, Jul 11, 2009.

  1. In which strategy, You buy a stock, sell a call and buy a put of the same strike?

    Which variation of a collar its this?
     
  2. Isn't that an arbitrage strategy? A conversion? Own the underlying with a synthetic short
     
  3. hidge

    hidge

    hello crgarcia,

    If you will look at the short call and the long put as an individual position you will find out that it synthetically a short stock.

    the combination between the stock and the equivalent for short stock is a position that has nowhere to go.

    Such a position will only make sense when you already own a stock which you don't want to sell, but you want to eliminate any down side risk.
    So, instead of selling it (shorting the stock) you are building a synthetically short position.

    Oded
     
  4. hidge

    hidge

    You are 100% right.

    The only thing is that from a retail point of view there are no arbitrage and the slippage will eat any opportunity that might rise,

    There for, the only reason that a trader might be interested in such a position is the risk elimination ("freezing" the stock)

    Oded
     
  5. Sorry that's not true.
     
  6. There are some tax reasons a retail trader would want to do the reversal or conversion but the days of a retail trader being able to arb the stock synthetically are long long gone.
     
  7. Not talking about the arb. Still there are situations where retail traders would trade conversions or reversals.

    Here's an example. You short a stock and buy a call to protect the upside, so you are long the synthetic put. Sometime later, your broker notifies you that your short stock is now hard-to-borrow and/or has been placed on a high-volatility list, leaving you subject to an unwanted buy-in, excessive short stock fees, etc. Perhaps you simply want to free up margin for other purposes. But you still want an equivalent position.

    You place an order to buy a conversion at the same strike as your long call. When filled, you have "converted" your synthetic put into a real put.

    :cool:
     
  8. Oded? And the letters "Hi"

    Is that Oded H??

    Mark
     
  9. hidge

    hidge

    You caught me Mark :)

    Small world isn't it?

    Regards,

    Oded
     
  10. LOL. That's a bit of a technicality.

    Your example utilizes a conversion order to convert A to B but the trader isn't holding a conversion at any time.

    :)
     
    #10     Jul 13, 2009