Managing the synthetic is a lot more complex than posters on this board would have you believe. For example once you've set up your married put (long stock plus long put, aka synthetic call) which, incidentally, can be legged rather than placed as a package, the fun starts. You can sell a call against your stock to make a 'collar', you can roll the put up/down/out, you can turn your bullish collar into a bearish one by rolling the short call strike below your put strike and on and on. The variations are endless but the trick is knowing when and where to roll, when to use the collar and when to just leave the married put alone. One more thing for you to ponder: you can't leg a call or a put but you can leg the synthetic. db
What about an earnings play on RIMM for tonight? I was considering the following bullish diagonal : Buy Dec 106.65's Sell Oct 105's What do you guys think? Considering a drop in IV more important on the octobers (historical IV is 45), this should make money between $88 and $126. What do you guys think?
Managing a synthetic isn't really more difficult than managing the true position. You make the same adjustments, and the positions stay equivalent. In your examples: Writing a call to make a collar - You could write the same call against your original long call to get an equivalent vertical spread. Rolling the put - You could roll your original long call for the same equivalent position. The only real trick with synthetics is that as you open more related positions you risk losing track of what you're really holding. Other than that, equivalents are just that - equivalent.
AFAIK, that's the advantage to the synthetic. Then it's off to the races with adjustment possibilities.
Given a post EA IV of 45, I think that your profit range is too optimistic. It's narrower. Plus, you go negative fairly quickly if RIMM drops. Historically, RIMM has dropped to approx. 40 post EA. An IV that low won't give you much profit potential on your diag. For the past few months, due to the sub prime mess, post EA IV has been tough to figure across the board and whether RIMM drops to historic 40 or stays elevated is a question mark. My guess is that it holds higher. For me, I don't see enough skew yet to offset the extra uncertainty.
I'm paper-trading a simple 90P/100C strangle on tonight's RIMM earnings, for what that's worth for the earnings discussion here. Never done one of them before.
I beg to disagree. ATM calls are more expensive than ATM puts because of the skew in the distribution. Median and Mean/Mode are not identical anymore. Thats the reason why calls > puts ATM. Also, ATM call deltas are slightly >0.5. Away from the money the same applies but obviously the deltas are not matched anymore. Carry applies to futures not options. Just my two cents.
Disagree. The interest rate / dividend components of option pricing are clear. Synthetic option equivalents to the underlying are also equivalent (not equal) to futures of the underlying.
er - before I get jumped - Equity futures options have no interest rate / div. component - it's in the future.