Since about 1 PM Eastern Time, AAPL has been on a wild roller coaster. Synthetic or not, for those of you on this wild ride, I sure hope you're strapped in and hedged. Bob
"Regarding the risk graphs...trust me, there is no similarity. The vertical normally resembles a letter Z or N...not exactly but you guys know what I'm talking about. What I generally come up has curves similar to a straddle." Q- I think that you're mixing apples and oranges. A vertiical will have the same risk graph shape as a collar (a sideways N). A diagonalized reverse collar such as your AAPL position under discussion, will have the same shape as a a diagonal spread (a "curve similar to a straddle"). However, as Don pointed out, due to the carry cost of the stock, the P&L numbers of the respective pairs will be different unless you take into account this amount. FWIW, I just blew out of the call side of an AAPL calendar strangle with today's run up. Small net profit and a bunch of free long puts left over. Can anyone arrange a big reversal (g)?
Spin or Don: Where is the carrying cost (other than the margin interest charge where applicable) when the stock is shorted? Bob
The cost of carry is priced in to the calls based on the put-call parity. If you short the stock then you receive margin interest, if you buy the stock you pay margin interest. A simple example, if you buy the stock and then sell a call and buy a put at the same strike you will create a conversion, a nearly risk-free position. The difference between the price you buy the stock at and the price you sell the synthetic stock at (short call+long put) is the cost of carry for the long stock to expiry.
MTE, One minor disagreement, most brokers pay little or no interest on the proceeds from short stock. They pay on the proceeds from short options, but not short stock. At least that is my experience. Don
Don, when you said, "If you short the stock then you receive margin interest, if you buy the stock you pay margin interest," I believe you have it backwards. You don't receive interest when you short the stock. You pay interest, and only if your Adjusted Cash Balance is less than the negative value of your short stock.
4Q, I think you meant to direct your comments to MTE. In any case, I don't know of any case where you pay interest to short stock even if your adjusted cash balance is less than the "negative value of your short stock". Don
Don, let me give you a not so hypothetical example. This morning you had a cash balance of $5,000. AAPL was at $86. You shorted 1,000 shares of AAPL at $86 and you receive $86,000. Now you have a cash balance of $91,000. Steve Jobs makes an announcement and the stock closes at $92. Your short value for your 1000 short shares is $92,000. Here's the question: Will you be charged interest on that $1,000 deficit between $92,000 and your cash balance of $91,000? You, or anyone else, can take a shot at that question. Unfortunately, I know the answer. Bob PS...sorry for the mix up with the wrong reference.
Don, I'm talking about pros like market makers who pay interest or get paid interest depending on their position. It is the market makers that price the options so you have to use their "terms". When calculating cost of carry, for pricing purposes, you can use the Fed Funds rate cause it is a fair estimate in terms of what the MMs pay, obviously a retail customer cannot get this kind of rate.
Interest Calculation on Shorted Stocks: 8 Ball and Others, I had promised an explanation of how the margin interest is charged when stocks are shorted. Actually, AAPL's $6 rise yesterday made this explanation quite simple. Look at my posting immediately prior to this one (page 15), where I use AAPL. It is a perfect example. Assume the broker charges 8.5% annual interest. The interest is charged on a daily basis and is collected monthly. Thus, the $1,000 margin debt in that example is subject to a margin interest charge for the day. The computation would thus be: $1,000 x .085 / 360 = 24 cents for the day. On this point I speak from actual experience. This is not theoretical conjecture. Also, what is interesting is that if by chance one also had shorted puts in their account, the premium received would have been part of the $5,000 starting balance, but the short value of the put would NOT be part of the $1,000 margin debt amount. This is a nice, but small, added benefit which surprised me a few years ago when I first became aware of this.