or just buy two atm calls or atm puts with delta at 0.5 to match the stks movement? do those trader trading options strategy require hedging do they use the theoretical delta value like those on optionxpress to determine the amount to hedge? because the value of options changes significantly different from those theoretical delta value
Once again even if you got a perfect Delta of 1 (using 1 or more contracts) you are still not going to have a perfect match with the underlying. Why? You still have to worry about the other greeks (most notably Theta and Vega). Theta represents time decay and Vega is your volatility risk. So if you bought a Dec Call option today and held it until close to expiration to try and capture a move in the market, the time decay could erode quite a bit of your profit. Add to that if Volatility fell during that time as well, you could very well find yourself in a losing trade even though the underlying moved in the right direction for you. Options are very powerful and very complex. Trading them without a full understanding of everything that can affect the trade is probably one of the fastest ways of blowing out your account.
What would be better would be getting the direction of the underlying right and making money with your option position
Indeed, the problem with deep ITMs can be a Holland Tunnel wide spread. Which is better in terms of margin requirement (deep ITM vs synthetic) depends on the strike and time remaining and perhaps one's incompetency (see below) . Closer to expiration, strikes with a delta of 1 will be closer to UL's price and will cost less than the margin requirement of the synthetic. The further away expiration is, the deeper ITM you'll have to go to get a delta of 1 and at some point, that cost may exceed the margin requirement. Two problems with the synthetic are 1) the margin requirement will increase as the UL moves against you (possibly negating the ITM's lower cost) and 2) it can lose more
Why is the syn return is so erratic compared to return of stk price? Does implied volatility making the return different? Or other factors? Selling and buy of options with delta 1 would be good option compared to syn position
Well, again, no single call will have a delta of 1, and no single put will have a delta of -1, although deep ITM options will come close. In my experience a long or short synthetic value tracks the stock price change to within the bid/ask spreads on the options. Typically the bid/ask spreads are wide enough that on a day to day basis the synthetic may not match the stock price change very well, but when holding out for longer periods they match pretty well. If they didn't you could make risk free profits on arbitrage. Implied volatility should not affect synthetic values because calls and puts at the same strike have the same implied volatility (again, to within the bid/ask spread) so, with one being long and the other being short, the IV effects cancel out. Again, if a delta of 1 in a leveraged trade is crucial to you, trade futures and watch your stops. They do not have as many moving parts as options and are simpler for pure directional traders. Options provide you with more ways to construct a trade, but that may or may not be useful for your trading style.
To add to rew's points. The synthetic is equivalent to an SSF with some contractual differences that could lead to early assignment or pin risk. Some of the erratic return may be attributed to the discounting of the div. particularly on 11/16 ex - div. date. Other than that it is the data that is erratic not the synthetic. Look at the Jan. synthetic. There's no div. factor and interest rate is negligible MSFT closed at 27.90 and yahoo shows the 30C at .11x.12 and the 30P at 2.23x2.24. That's about a 2.10 difference and 30-2.10 = 27.90. There's a disrepancy with yahoo's pricing, so let's suppose that you buy the call for .15 and sell the put for 2.20. That's 30-2.05=27.95. This syn will track the UL perfectly (except for possible contractual risks) less the .05 "slippage" and transaction costs. The data may not reflect this perfectly - real time prices would give a more accurate picture - as rew pointed out within the B/A spread. Of course, there are also trading issues with how well the syn ultimately tracks. To close before expiry means trading a two legged option combo vs. the more liquid UL. There may be more slippage here.
As donnap suggested, it's the data that's erratic. If you look at the respective bid and ask of the options in real time, the synthetic will tend to track the underlying fairly well. Looking at either delayed or closing quotes is a waste of time for accuracy.
Using buy sell price of syn to calculate the return does not match the return of stk price. The "equity return" of the syn is decreasing compared to stk return. Because of the big buy sell price different and small buy sell price different of the stk, the equity return of syn is decreasing. The more u hold syn position the bigger is the different between syn return and stk return